You are given the following data concerning an economy:
(1)Consumption function: C = 200 + 0.8Y
(2)Investment function: I = 100
(3) AD = C +I
(4) AS = Y.
(a) What are the marginal propensity to consume and the marginal propensity to save?
(b) Graph equations (3) and (4) and solve for equilibrium income.
(c) Suppose equation (2) were changed to
                                               I = 110
What is the new equilibrium level of income? By how much does the Rs. 10 increase in planned investment change equilibrium income? What is the value of the multiplier?
(d) Calculate the saving function. Plot this saving function on a graph with eq. (2). Explain why the equilibrium income in this graph must be the same as in part (b).

(a)    MPC = 0.8; MPS = 0.2


(b)    Fig. 9.10
(c)    ΔY = (1/MPS) Δ I. Multiplier = 1/MPS = 10.2 =5. In this case, with the multiplier equal to 5 and an increase in investment of 10, ΔY =(5) (20) =50.
Equilibrium Y increases from 1,500 to 1,550.
(d)                                               S = Y-C
                                                    = Y-(200 + 0.8Y)
                                                    = -200 + 0.2Y
The equilibrium must be the same in both graphs because Y = C +I and S = I are the same condition.