Question

The US economy is represented by the following equations: Z=C+I+G, C=300+.5YD, YD =Y T T =400, I =250, G=1000 Given the above variables, calculate the equilibrium level of output. Now assume that consumer confidence increases causing a rise in autonomous consumption (c0) from 300 to 500. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?

Answer 1

Ans: The equilibrium level of output is 2700

Explanation:

Y = C + I + G

Y = 300 + 0.5YD + 250 + 1000

Y = 300 + 0.5 ( Y - T ) + 250 + 1000

Y = 300 + 0.5 ( Y - 400 ) + 250 + 1000

Y = 300 + 0.5 Y - 200 + 250 + 1000

Y - 0.5Y = 1350

0.5 Y = 1350

Y = 1350 / 0.5 = 2700

Ans: The new equilibrium level of output is 3100

Explanation:

Y = C + I + G

Y = 500 + 0.5YD + 250 + 1000

Y = 500 + 0.5 ( Y - T ) + 250 + 1000

Y = 500 + 0.5 ( Y - 400 ) + 250 + 1000

Y = 500 + 0.5 Y - 200 + 250 + 1000

Y - 0.5Y = 1550

0.5 Y = 1550

Y = 1550 / 0.5 = 3100

Ans: As a result of this event the income changes by 400

Explanation:

As a result of this event the income changes by ;

= 3100 - 2700 = 400

Ans: The multiplier for this economy is 2

Explanation:

MPC = 0.5

Multiplier = 1 / ( 1- MPC)

= 1 / ( 1 - 0.5)

= 1 / 0.5

= 2