The following equations describe a particular macroeconomic system: C = 100,000

Question

The following equations describe a particular macroeconomic system:

C = 100,000 + .85Yd

I = 85,000

G = 55,000

T = .04Y

a. Find the equilibrium level of aggregate output Y; the economy’s tax bill T; the level of disposable income Yd; consumption spending C; and the level of Saving when the economy is in equilibrium. Check your results and illustrate the solution in a diagram.

What is the multiplier in this economy?

b. If the full employment level of aggregate output is $1,325,000, how much would the government have to increase or decrease its spending to bring aggregate demand into line with Yfe?

c. Suppose the tax code were altered to include a tax credit for households at low level of incomes, so that the fourth equation were now:

T = –2,000 + .04Y

Find the equilibrium level of aggregate output Y; the economy’s tax bill T; the level of disposable income Yd; consumption spending C; and the level of Saving when the economy is in equilibrium. Check your results and illustrate the solution in a diagram. What is the multiplier in this economy?

Explanation / Answer

a) As Y=C+I+G

=100000+.85Yd +85000+55000

= 100000+.85 (Y-T) +85000+55000

=240000+.85 (Y-.4Y)

=240000+.85×.6Y

=240000+5.10

=240005.10

T=240005.10×.04

=960020

Yd= 960020-240005

=720015

C=100000+.85×720015

=100000+61200295

=61300295

S=85000

Multiplier=1/1-MPC where MPC=Marginal propensity to consume.

=1/ 1-.85

=0.66

b)If the full employment level of aggregate output is $1325000.The Government have to increase its spending.

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