Question: The consumption function for the People’s Republic of Dyspepsia is C = 150 + 0.75Y, where C=Consumption and Y=Income. Investment is fixed at 50 (all figures are in billions). We also know that: AE = C + I and AE = Y. Given this:

a) What are the MPC and MPS in Dyspepsia?

b) Graph AE = C + I and AE = Y. Show the equilibrium level of income on your graph. Solve for the equilibrium level of income algebraically.

c) What happens to inventories if Y=700?

d) Suppose Investment rises to 75. What happens to the equilibrium level of income?

e) What is the multiplier?