3. Assume that all expenditure is summarized in the following consumption and in

Question

3.Assume that all expenditure is summarized in the following consumption and investment functions:

C = $200 billion + 0.8 YD

I = $200 billion

Use this information to complete this problem:

a. Identify the equilibrium rate of output (or GDP) .

b.If full-employment GDP equals $2500 billion ,what kind of Gap will develop (recessionary or Inflationary )

c. How much is the gap ?

d.What is the value of the multiplier?

e. What would happen to equilibrium GDP if the rate of investment increased to $250 from current $200 billion per year?

f.  If net exports go up by $20 billion what would happen to Equilibrium GDP?

Assume that all expenditure is summarized in the following consumption and investment functions: C = $200 billion + 0.8 YD I = $200 billion Use this information to complete this problem: Identify the equilibrium rate of output (or GDP) . .If full-employment GDP equals $2500 billion ,what kind of Gap will develop (recessionary or Inflationary ) How much is the gap ? What is the value of the multiplier? What would happen to equilibrium GDP if the rate of investment increased to $250 from current $200 billion per year? If net exports go up by $20 billion what would happen to Equilibrium GDP?

Explanation / Answer

we have Y= C+S

so S= Y-C

Y-200-0.8Yd

= 0.2Yd-200

so at equillibrium S=I

200=0.2Yd-200

or Yd= 2000

b).full-employment GDP is 2500 which is more than 2000 so it is inflationary

c).the gap is 2500-2000

= 500

d).Y=C+I

Y=200+0.8Y+I

0.2Y=200+I

SO multiplier is 1/0.2

= 5

e).then we wil,l have

250=0.2Yd-200

or

Yd= 450/0.2

=2250

so it will rise up

f). Y= C+I+(X-M)

since net export goes up by 20 billion dollar GDP will also go up by 20 billion dollar

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