Question

The following equations describe consumption, investment, government spending, taxes, and net exports in the country of Economika. Cequals=300+0.90(Yminus− T) Iequals=400 Gequals=350 Tequals=350 Xequals=100 In Economika, equilibrium GDP is equal to $___. (Round your asnwer the nearest dollar.) If real GDP in Economika is currently 9$,350 , which of the following is true?

A. There will be an unplanned decreasedecrease in inventories, and real GDP will increaseincrease next period.

B. There will be an unplanned decreasedecrease in inventories, and real GDP will decreasedecrease next period.

C. There will be an unplanned increaseincrease in inventories, and real GDP will decreasedecrease next period.

D. There will be an unplanned increaseincrease in inventories, and real GDP will increaseincrease next period.

E. There will be no unplanned change in inventories, and real GDP will stay the same next period.

Answer 1

From the national income accounting we have

C = 300+0.90(Y − T) I = 400 G = 350 T =3 50 X = 100

Y = C + I + G + X - M

Y = 300 + 0.9*(Y - 350) + 400 + 350 + 100

0.1Y = 835

Y* = 8350

The equilibrium GDP is equal to $8350 If real GDP in Economika is currently $,9350 ,it indicates that current GDP is greater than equilibrium one so real GDP will decrease. Also since goods are not sold, there will be an unplanned increase in inventories, and real GDP will decrease in next period.

Option C is correct.