ADVANCED ANALYSIS Assume tha t the consumption schedule for a private open econo

Question

ADVANCED ANALYSIS Assume tha t the consumption schedule for a private open economy is such that consumption is C 50+0.75Y Assume further that planned investment lg government spending G and net exports Xn are independent of the level of 30, G 0 and Xn -10. Recall also that, in equilibrium, the real output produced () is equal to aggregate expenditures Instructions: Round your answers to the nearest whole number. a. Calculate the equilibrium level of income or real GDP for this economy Equilibrium GDP (Y) b. What happens to equilibrium GDP if ig changes to 10? Equilibrium GDP (Y) : What does this outcome reveal about the size of the multiplier? Multiplier

Explanation / Answer

(a)

C = 50 + 0.75Y

Ig = 30

G = 0

Xn = 10

At equilibrium,

Y = C + Ig + G + Xn

Y = 50 + 0.75Y + 30 + 0 + 10

Y - 0.75Y = 90

0.25Y = 90

Y = 90/0.25 = 360

Y = 360

The equilibrium GDP(Y) is 360.

(b)

Now, Ig becomes 10.

C = 50 + 0.75Y

Ig = 10

G = 0

Xn = 10

At equilibrium,

Y = C + Ig + G + Xn

Y = 50 + 0.75Y + 10 + 0 + 10

Y - 0.75Y = 70

0.25Y = 70

Y = 70/0.25 = 280

Y = 280

The equilibrium GDP(Y) is 280.

Calculate the size of multiplier -

Multiplier = Change in Y/Change in Ig = 80/20 = 4

The size of Multiplier is 4.

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