Given the following macroeconomic model, where variables are defined as in the lecture: Y=E (aggregate income/expenditure identity):
E=C+I
C=aY+120
I=800 (exogenous investment)
C - equilibrium condition
Where a=0.8
a) Find the equilibrium levels of income and consumption, and illustrate diagrammatically.
b) Suppose consumers become more pessimistic about the future and decide to save 10 more at every level of income. Find the new level of Y, change in Y, new level of C and change in C.
c) By how much would investment need to rise to restore Y to its previous level?