Assume That Consumption Is Represented by the Following: C =

question 103

Essay

Assume that consumption is represented by the following: C = 200 + 0.75Y. Also assume that investment (I) equals 300.
(a) Given the information, calculate the equilibrium level of income.
(b) Given the information, calculate the level of consumption and saving that occurs at the equilibrium level of income.
(c) Now suppose that individuals decide to increase their saving so that autonomous consumption falls by 100. The consumption function is now C = 100 + 0.75Y. Calculate the new equilibrium level of income, the new level of consumption, and the new level of saving.
(d) Based on your analysis in Part (c), did the level of saving change as a result of this increased desire to save? Explain.

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Definitions:

Buyers Pay

The principle where the purchaser of a good or service is responsible for paying any tax or additional cost associated with its purchase.

Tax Burden

The total amount of tax paid by individuals or businesses, often expressed as a percentage of income or economic output.

Tax Imposed

A compulsory financial charge or some other type of levy placed upon a taxpayer by a governmental organization.

Less Elastic

Describes a situation where the demand or supply for a good or service is less responsive to changes in price.