Question X atservlet/quiziquiz action-takeQuiz&quiz; probGuid -Q4PLCOA8010100000

Question

Question X atservlet/quiziquiz action-takeQuiz&quiz; probGuid -Q4PLCOA80101000000421597600400008cbx-bconways-0 0136ack-m_ 1532907606926 DAAAE The Keynesian Cross (Mobile Enhanced) Due Sunday 08 05 18et 11 45 PM D0 No Harmi 13 Attempts 2. Algebra of the incomse expenditure mode Consider a small economy that is clesed to trade, sothat its net expets are zere. Suppose that the ecenomy has the folowing consumption function where C is consumptien, Y is income (real Gop). Ip s planned investment, G as government purchases, and Tis taxes C 20+075 x (YT) Suppose G $35 billion, I$00 biien, and T-$20 biin a G the equitbrium Given the consumption function and the fact that, in a closed econemy, planned sxpenditure can be calculated s YC+Ipt Suppess that geveremant purchases ane ncressed by $100 billien. The new equilbrium level of income will be equal to ened on the .#ect of the change in government purchases on eealarium ncome, you can sel that this economya-ne-niqual to-

Explanation / Answer

Ans

C = 20 + 0.75 * ( Y - T) , given that G = 35 billion, IP = 60 billion and T = 20 billion

So C = 20 + 0.75 * ( Y - 20 )

C = 20 + 0.75 Y - 15 = 5 + 0.75 Y , where 5 is autonomous consumption and 0.75 Y is induced consumption.

A) to calculate for equiliberium level of income

Y = C + IP + G ( substitute above consumption function here in C and values of I and G)

Y = 5 + 0.75Y +60 + 35 = 100 +0.75Y

Y - 0.75Y = 100

0.25Y = 100

Y= 100 /0.25 =400

Thus equiliberium income in closed economy is 400.

B) When goverenment purchase increase by $100 then equiliberium level of income

Y = C + I + G

Y = 5 + 0.75Y + 60 + 100 = 165 + 0.75Y

Y - 0.75Y = 165

0.25Y = 165

Y = 660

So now equiliberium level of income has increased by 660 with increase in government purchasing.

C) Multipier is calculated as change in equiliberium level of income divided by change in government spending.

Change in income = 660 - 400 = 260

Change in goverenment spending = 100 -35 =65

Thus multiplier of economy is 260 / 65 = 4

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.