Question

An economy is described by the following equations:

C |
= 1,500 + 0.9 ( |

I
^{p} |
= 1000 |

G |
= 1,500 |

NX |
= 100 |

T |
= 1,500 |

Y* |
= 8,800 |

The multiplier for this economy is 10.

Find the effect on short-run equilibrium output of:

a. An increase in government purchases by 100 from 1,500 to
1,600.

**Instruction:** Enter your response as an integer
value.

Short-run equilibrium output will increase to .

b. A decrease in tax collections from 1,500 to 1,400 (leaving
government purchases at their original value of 1,500).

**Instruction:** Enter your response as an integer
value.

Short-run equilibrium output will increase to

c. A decrease in planned investment spending by 100 from 1,000 to
900 (leaving government purchases and taxes unchanged at their
original values of 1,500).

**Instruction:** Enter your response as an integer
value.

Short-run equilibrium output will decrease to .

Answer #1

1500+0.9*(Y-1500)+1000+1500+100 = Y

2750 = 0.1Y

Y* = AE* = 27500.

a. An increase in government purchases by 100 from 1,500 to 1,600
will increase the real GDP by

100*10 (multiplier) = $1000. New GDP is 28500.

Short-run equilibrium output will increase to 28500.

b. A decrease in tax collections from 1,500 to 1,400 will increase
GDP by 900. This is because tax

multiplier is MPC/1-MPC = 0.9/0.1 = 0. Hence increase in GDP =
9*100 = 900

Short-run equilibrium output will increase to 28400

c. A decrease in planned investment spending by 100 from 1,000 to
900 will decrease GDP by 1000

because multiplier is 10 so decrease in GDP = 100*10 = 1000

Short-run equilibrium output will decrease to 26500.

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