Question

suppose equilibrium outpuris k500 when consumption is C=K40+0.80YD, investment is I= K60 and there are no taxes or government spending.
what happens to output when K10 on government spending is introduced?

someone please answer the above ASAP full calculations please

Answer 1

Equilibrium occurs when Y = AE

where Y = income(or output) and AE = Aggregate expenditure = C + I + G (Considering economy is closed)

As there are no taxes, thus YD = disposable income = Y.

Initially, AE = C + I = 40 + 0.8Y + 60 = 100 + 0.8Y

So, Y = AE => Y = 100 + 0.8Y => Y = 500

Thus, Initial equilibrium output = K500

Now because of Government spending(G), AE becomes, AE = C + I + G = 40 + 0.8Y + 60 + 10 = 110 + 0.8Y

So, Y = AE => Y = 110 + 0.8Y => Y = 110/0.2 = 550

Thus, New equilibrium output = K550

Thus when government spending is introduced, Equilibrium Output will increase by K550 - K500 = K50

Hence, Because of government spending, Equilibrium Output will increase by K50