Question

1) C = 40 + 0.6*Y I = 40 G = 20. What is the equilibrium output ? .Round if necessary.

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2) C = 100 + 5* Y What is conceptually wrong with this equation ?

A)There is nothing wrong with this equation

B)Consumption is negatively related to Income

C)Your extra consumption can not be more than 100% of extra income.

D)When Income is zero, you can not have any consumption.

3) C = 20 + .2*Y What is the value of the Investment multiplier?

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Answer 1

1. Aggregate expenditure, AE = C+ I + G

At equilibrium , output, Y = AE.

Y = C+I + G

Y = 40 + 0.6Y + 40 + 20

0.4 Y = 100

Y = 100/0.4

Y = $ 250 [Equilibrium level of output].

2. C= 100+ 5Y

In this equation MPC = 5 , which implies that change in consumption is more than change in income.It implies that marginal change in consumption is more than 100% change in income , which is not possible.

Hence, Your extra consumption cannot be more than 100% of extra income is wrong in this equation.

3. C= 20 + 0.5 Y

Investment multiplier = 1/ (1-MPC)

MPC = 0.5

Value of the Investment multiplier = 1/ (1-0.5 )= 1/ 0.5 = 2.