An economy has a break-even point of 3,000. For every additional dollar earned b

Question

An economy has a break-even point of 3,000. For every additional dollar earned by households, they spend 80 cents. Government purchases $596 in goods and services and also spends $742 in transfer payments. Business invests $53 in plant, equipment and inventory. Foreign buyers purchase $60 and buyers from the US purchase $56 from foreign countries. (All spending and income figures are in billions) the unemployment rate is 8.0% and the NRU is estimated to be about 5%.
1. What is the equilibrium level of GDP in this economy? B. What is the equilibrium level of Aggregate Expenditures in this economy? C. At equilibrium, what is the level of consumption in this economy? An economy has a break-even point of 3,000. For every additional dollar earned by households, they spend 80 cents. Government purchases $596 in goods and services and also spends $742 in transfer payments. Business invests $53 in plant, equipment and inventory. Foreign buyers purchase $60 and buyers from the US purchase $56 from foreign countries. (All spending and income figures are in billions) the unemployment rate is 8.0% and the NRU is estimated to be about 5%.
1. What is the equilibrium level of GDP in this economy? B. What is the equilibrium level of Aggregate Expenditures in this economy? C. At equilibrium, what is the level of consumption in this economy?
1. What is the equilibrium level of GDP in this economy? B. What is the equilibrium level of Aggregate Expenditures in this economy? C. At equilibrium, what is the level of consumption in this economy?

Explanation / Answer

1. At equlibrium Y = Aggregate expenditure, where

Y = C + I + G + NX

Where C = c + MPC * Y (consumption function)

c = 3,000 as it is the break even point, means income = consumption, this is the autonomous consumption.

MPC = 0.8 as given that, household spend 80 cents of additional dollar. ( MPC = change in consumption / change in income )

Here, MPC = 80 cents / 100 cents = 0.8

I = private investment, which is given as $53

G = government expediture = $596

Transfer payments are not included in government spendings so I am not including it.

NX = net exports ( exports - imports) = $60 - $56 = $4

Equilibrium level of GDP :

Y = 3000 + 0.8Y + 53 + 596 + 4

Y = 3653 + 0.8Y

Y = 18,265.

So equlibrium level of GDP = $18,265 billions.

B. Aggregate expenditure at equilibrium is equal to GDp so

Aggregate expenditure at equilibrium is also $18,265 billions.

C. Consumption at equilibrium

C = 3,000 + 0.8Y

At equilibrium Y = $18,265

Put in consumption

C = $17,612 billions.

At equilibrium, the level of consumption is $17,612 billion

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