Please explain mathematically all parts. 6 Consider a closed economy with no gov
ID: 1151481 • Letter: P
Question
Please explain mathematically all parts.
6 Consider a closed economy with no government. Use notation Y income C consumption l investment S saving Assume that consumption is given by C-A+cY andY C+I where A and care both positive and cisless than 1. Which of the following statements IS correct? (a) Suppose thatc-0.75. Suppose that investment increases by 100 because investors become more optimistic. Then income increases by 500 (b) If saving and investment are at thair planned levels and S I then the economy ls In equilibriurn (c) Ic 0.75 then the multipier is 0.75 (d) Il consumers become more willing to consume so c inceases but I and A do not change then income talls.Explanation / Answer
a) With MPC or c = 0.75, multiplier is 1/1-0.75 = 4. If investment increases by 100, increase in income will be = multiplier x increase in investment = 4 x 100 = 400. So the statement is false.
b) For a closed economy when S = I it implies that economy is in equilibrium because C + S = C + I or planned income = planned spending. True
c) False because multiplier is 1/1-mpc = 1/1-0.75 = 4
d) If c increases, MPC rises and so income will rise because this will increase overall consumption and shift consumption function up. False.