Question 1
According to Irving Fisher, “money illusion” caused business cycles. Briefly explain.
Question 2
What were the causes of business cycles found by Schumpeter?
Question 3 (Brue and Grant, 2013, p.473)
Use the information in the table to answer the following questions. Assume initially that no
government spending or taxes occur in this hypothetical economy.
Income (Y) Consumption (C) Savings (S) Investment (I)

$0 $20 $-20 $40
100 100 0 40
200 180 20 40
300 260 40 40
400 340 60 40
(a) What is the marginal propensity to consume in this economy? What is the marginal propensity
to save?
(b) What is the equilibrium level of income?
(c) Suppose investment spending declined by $20. What would be the new equilibrium income
and the new level of consumption? What is the size of the multiplier? Why would it be reasonable
to assume that an increase in the unemployment rate would be associated with the decline in
national income?
(d) What actions, according to Keynes, could the government take to restore the equilibrium level
of income that you determined in part (b)?
Question 4
Compare the work of Edgeworth and Marshall.