Solving the Keynesian model algebraically Consider a small country that is close

Question

Solving the Keynesian model algebraically Consider a small country that is closed to trade, so its net exports are equal to zero. Suppose the following equations describe the economy of this country in billions of dollars, where C is consumption, Y is real GDP, I is planned investment, G is government purchases, and T is net taxes. C = 40 + 0.5(Y - T) I = 50 G = 315 T = 10 Solve for the level of equilibrium income by entering the appropriate numbers into the following equations. Y = C + I + G Y =__________+__________(Y-__________)+__________+__________Y =__________+__________(Y-__________) Y =__________+__________Y__________Y =__________Y =__________This economy's equilibrium income is__________. Suppose the government decides to reduce its purchases by $200 billion. After it does so, this economy's equilibrium income will equal__________, which is__________than it was before. Based on the effect of the change in government purchases on equilibrium output, you can tell that this economy's government-purchases multiplier is equal to 3 0.5 2 1.

Explanation / Answer

Y = C + I + G

Y = 40 + 0.5(Y - T) + 50 + 315

Y = 405 + 0.5(Y - 10)

Y = 405 + 0.5Y - 5

Y = 400 + 0.5Y

0.5Y = 400

Y = 800

Answer to blank 1: 800

Answer to blank 2: 400

Explanation:

Y = C + I + G

Y = 40 + 0.5(Y - NT) + 50 + 115

Y = 205 + 0.5(Y - 10)

Y = 205 + 0.5Y - 5

Y = 200 + 0.5Y

0.5Y = 200

Y = 400

Answer to blank 1: Less

Answer to blank 1: 2

Explanation:

multiplier = 1/ 1 - mpc = 1 / 1 - 0.5 = 2

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