The Following Table Shows the Relationship Between Income and Consumption

The following table shows the relationship between income and consumption in an economy.

Assume that investment (I) is $5 billion, government purchases (G) are $4 billion, and net exports (X) are $1 billion.

(A)What is the numerical value of the marginal propensity to consume?

(B)Construct a table that is analogous to the one presented in the text for this economy. What is the level of income at the point of spending balance?

(C)For this level of income, calculate national saving. Is national saving equal to investment plus net exports?

(D)Suppose the above problem is modified to include taxes. Suppose first that, at any level of income, consumers must pay taxes equal to $3 billion. Find the new level of spending balance by modifying the table. Hint: If consumers have to pay taxes, this is income that they cannot use for consumption. Verify again that national saving is equal to investment plus net exports. Find private and government saving.

(E)Graphically illustrate what happens to spending balance when the government increases taxes by $3 million.