Question

consider the Macroeconomic model

G=30(government expenditure)

I=90 (planned investment)

C= 0.8Y+20 (consumption)

Y= C+G+I(equilibrium)

work out the change in the national income Y when government expenditure rises by 1 unit.

Answer #1

Answer : Y = C + G + I

By putting given values in Y we get,

Y = (0.8Y + 20) + 30 +90

=> Y = 0.8Y + 20 + 30 + 90

=> Y - 0.8Y = 140

=> 0.2Y = 140

=> Y = 140 / 0.2

=> Y = 700

Now if government expenditure increase by 1 unit then G become,

G = 30 + 1 = 31

Now

Y = (0.8Y + 20) + 31 +90

=> Y = 0.8Y + 20 + 31 + 90

=> Y - 0.8Y = 141

=> 0.2Y = 141

=> Y = 141 / 0.2

=> Y = 705

Now we can see that due to increase in government expenditure buy 1 unit the national income Y increases by (705 - 700) = 5 units.

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Income
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Consumption
Expenditure
Saving
Investment
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Government
Expenditure
Net Export
Expenditure
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Expenditure
$8000
$11,000
$2,500
$5,000
$12,500
12,000
14,000
2,500
5,000
12,500
20,000
20,000
2,500
5,000
12,500
30,000
27,500
2,500
5,000
12,500
50,000
42,500
2,500
5,000
12,500
100,000
80,000
2,500
5,000
12,500
Calculate savings, MPC, MPS, break even income, and the
equilibrium level of income (Y = AE = C + I + G +NX) in the above
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