1. Consider an economy in which C = 1000 + 0.75 Y D , I = 200, G = 300, T = 300,

Question

1. Consider an economy in which C = 1000 + 0.75YD, I = 200, G = 300, T = 300, and (X-M) = 0.

A. Calculate equilibrium GDP. (3 points)

B. Calculate saving at this level of GDP. Hint: Use the equation for leakages. (4 points)

C. Calculate the spending multiplier. (2 points)

D. Calculate the tax multiplier. (2 points)

E. How will equilibrium GDP change if G increases by 100, and what is the new equilibrium level of GDP? (4 points)

F. How will equilibrium GDP change if G and T both increase by 500, and what is the new equilibrium level of GDP? (3 points)

Explanation / Answer

Ans A - In equilibrium, Y = C + I + G + NX

Yd = Y – T

Y = 1000 + 0.75 x (Y - 300) + 200 + 300

Y = 1000 + 0.75Y - 225 + 500

Y = 1275 + 0.75Y

0.25Y = 1275

Y = 5100

Ans B - Savings = 0.25Yd.

Yd = Y - T = 5100 - 300 = 4800

Savings = 0.25 x 4800 = 1200

Ans C - Spending multiplier = 1 / (1 - MPC)

MPC = 0.75

Spending multiplier = 1 / 0.25 = 4

Ans D - Tax multiplier = MPC / MPS = 0.75 / 0.25 = 3

Ans E - In equilibrium, Y = C + I + G + NX

Yd = Y – T

Y = 1000 + 0.75 x (Y - 300) + 200 + 400

Y = 1000 + 0.75Y - 225 + 200 + 400

0.25Y = 1375

Y = 5500

Change in GDP = 5500 - 5100 = 400

Ans F - In equilibrium, Y = C + I + G + NX

Yd = Y – T

Y = 1000 + 0.75 x (Y - 800) + 200 + 800

Y = 2000 + 0.75Y - 600

0.25Y = 1400

Y = 5600

Change in GDP = 5600 - 5100 = 500

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.