With fixed government expenditures of G = 150 and fixed taxes of of T= 200. Assu

Question

With fixed government expenditures of G = 150 and fixed taxes of of T= 200. Assume that that consumers behave as described in the following consumption function:
C= 150 + .75(Y-T)

Suppose further that investment spending is fixed at 100. Calculate the equilibrium level of GDP. Solve for equilibrium levels of Y, C, and S

Next assume taxes were reduced by 20 to a level of 180. Recalculate the equilibrium level of GDP using tax multiplier. solve for equilibrium levels of Y, C and S, after the tax cut.

Explanation / Answer

Y = C + I + G Y = 150 + 0.75(Y - T) + I + G Y = 150 + 0.75Y - 0.75T + I + G 0.25Y = 150 - 0.75T + I + G Y = 4(150 - 0.75T + I + G) Sub. G = 150, T = 200, I = 100 into the eqn, Y = 4(150 - 0.75*200 + 100 + 150) = 4(150 - 150 + 100 + 150) = 1,000 C = 0.75(Y - T) = 0.75(1,000 - 200) = 600 For C = a + bYd, S = - a + (1-b)Yd therefore, S = -150 + 0.25(Y - T) = -150 + 0.25(1,000 - 200) = 50 please dont forget to rate my answer :)

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