Question

Assume that all expenditure is summarized in the following consumption and investment functions: ( 15 pts. ) [Hint: Review Chapters 9, Equilibrium GDP formula ,10, and 11 . You have to use a little of your algebra knowledge for this question along with economics from these chapters . you will have to figure out the numbers in all parts except part 2 for full credit.]

C = $300 billion + 0.8 YD
I = $300 billion

Use this information to complete this problem: (2.5 points for each part )
Identify the equilibrium rate of output (or GDP).
If full-employment GDP equals $2500 billion, what kind of Gap will develop (recessionary or Inflationary )? Explain clearly. How much is the gap?
What is the value of the multiplier?
What would happen to equilibrium GDP if the rate of investment increased to $250 from current $200 billion per year?
What will happen to Equilibrium GDP if Govt. takes a stimulus plan by increasing its spending by $50 billion ?

Answer 1