lage noeases in values (atorm at weath) and ts posable ehc on saing and ment The

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lage noeases in values (atorm at weath) and ts posable ehc on saing and ment The following cosumption function incorporates weath (W) as a deteminant of consumption We have the tolowing information on consumption (C) and investment C-50 0.8Y 0.10 - 1- 150 W 1.200 We are ignoring the fact that saving adds to the stock of weh cakiste to values of edenm Y.C.?d saving (S)(Ener your responses as itegn) Suppose that weath incresses by 50 percent. Calcuiate te values of equilbrium Y, C and S. (Ender your responses a inegers New C. As a resut of the wealth accumulation, GDP remains unchanged Enter your anewer in each of the answer b decreases Save for Later

Explanation / Answer

Equilibrium Y is equal to C + I

Y = C + I

Y = 50 + 0.8Y + 0.10W + 150

Put W = 1200

0.2Y = 320

Y = $1600.

Now put Y in C,

C = 50 + 0.8*1600 + 0.10*1200

C = $1450

We know that, S = Y-C

It means, S = $1600 - $1450 = $150

The equilibrium value of Y,C and S

Y = $1600

C = $1450

S = $150

If wealth increase by 50%, it means new wealth = 1200 + 1200*50/100 = 1800.

So to calculate equilibrium Y, C and S after wealth increase, we put W = $1800.

Y = C + I

Y = 50 + 0.8 Y + 0.10*1800 + 150

0.2Y = 380

Y = $1900

Put Y in C,

C = 50 + 0.8*1900 + 0.10*1800

C = $1750

S = Y - C

S = 1900 - 1750 = $150

So after wealth increase by 50%,

Y = $1900

C = $1750

S = $150

As a result wealth accumulated, GDP increases.

It is so because at equilibrium Y = GDP and when wealth accumulated by 50% more the Y increases from $1600 to $1900 so GDp also increases from the same amount.

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