Question

  a = 120

            b = .75

            G = 45

            Ex = 10

            IM = 15

1. Solve for the equilibrium level of GDP

2 What is the value of the multiplier?

3. How much would the government need to inject into the economy to get the economy to 900?

4. If the MPC (before we changed the amount of government spending in question 3) increased to .8, what would be the new equilibrium level of GDP?

           

            a = 100

            b = .9

            I = 30

            G = 40

            Ex = 10

            IM = 10

5. Solve for the equilibrium level of GDP

6. What is the value of the multiplier?

7. How much would the government need to inject into the economy to get the economy to 2000?

8. If the MPC (before we changed the amount of government spending in question 3) decreased to .8, what would be the new equilibrium level of GDP?

Answer 1

1. At the equilibrium, AD = Y

C + I + G + NX = Y

120 + 0.75Y + 45 + 10 – 15 = Y

160 = 0.25Y

Y = 160*4 = 640.

2 Multiplier = 1/1-MPC = 1/1-0.75 = 4.

3. Recessionary gap is 900 – 640 = 260. Hence required amount of money to be injected is increase in income/multiplier = 260/4 = 65.

4. Use the same equation AD = Y

120 + 0.8Y + 45 + 10 – 15 = Y

160 = 0.2Y

New Y = 160*5 = 800.

5. At equilibrium, AD = Y

100 + 0.9Y + 30 + 40 + 10 - 10 = Y

170 = 0.1Y

Y = 1700

6) Multiplier = 1/1-0.9 = 10

7) Recessionary gap is 2000 – 1700 = 300. Hence required amount of money to be injected is increase in income/multiplier = 300/10 = 30.

8) At equilibrium, AD = Y

100 + 0.8Y + 30 + 40 + 10 - 10 = Y

170 = 0.2Y

New Y = 170*5 = 850.