Marginal Propensity to Consume (MPC).

Homework Assignment II (5 p.) – due Thursday, 05/02, before class. Please use canvas to submit your answers (as doc, docx, pdf).Answer the following questions.1) Assume the following values: Marginal Propensity to Consume (MPC) b = 0.8; Autonomous Consumption a = 250; Investment Spending I = 500. 

There is no government spending at this point.a) For a consumption function C = a + bY, what is the equilibrium value for income Y in the economy (Y = C + I, here)? (1)b) What is the value of Y if Investment Spending increases to 750? (0.5)c) 

What can you observe in the change in Y that follows changes in I? How is the effect called that is apparent in your results? (1) d) If you add the government sector, with expenditure G = 250, what is the new equilibrium income? (For I = 750) (0.5)2) What happens when the Marginal Propensity to Save (MPS) is reduced? How does equilibrium output change? (1)  3) Use the MPS to explain the ‘paradox of thrift’. (1)

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