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

ID: 1196933 • Letter: Q

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?

Y = C + I + G + NX

Y = (1,000 + 0.65Y) + 1,500 + 1,500 - 500

Y = 1,000 + 1,500 + 1,000 + 0.65Y

Y - 0.65Y = 3,500

0.35Y = 3,500

Y = (3,500/0.35) = 10,000

If c increases from 0.65 to 0.75, the previous equation becomes

Y - 0.75Y = 3,500

0.25 Y = 3,500

Y = (3,500/.25) = 14,000

Thus, if MPC increases from 0.65 to 0.75, real GDP will increase from 10,000 to 14,000.

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