Question-2: Solve the following macroeconomic model wherein ; Y = C + I + G + NX

Question

Question-2: Solve the following macroeconomic model wherein;

Y = C + I + G + NX                 is the equilibrium condition in macroeconomic model

C = 1,000 + 0.65Y                     consumption function ( C = C0+cYd), where c is MPC

I = 1,500                                   planned investment function

G =1,500                                    government purchases function

NX = -500                                  net export function

Find the value of Real GDP (Y) by solving above macroeconomic model?

GDP = consumption + investment + government investment = (export - imports)

Y = C+I+G+NX

                             =

If the value of Marginal Propensity to Consume (MPC) increases from

c =0.65   to   c = 0.75, then how it will affect the Real GDP (Y) in the economy?

Explanation / Answer

Y = C + I + G + NX

Y = (1000+0.65Y) + 1500 + 1500 + (-500+

(Y-0.65Y) = 1000 + 1500 -500; 0.35Y = 2000

So, Y = 2000 / 0.35 = 5714.28.

-

If c = 0.75 then 0.25Y = 2000

Y = 2000/0.25 = 8000.

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