Please I need Help in Macroeconomics Problem 1: (25 pts) A fictive economy is ch
ID: 1101157 • Letter: P
Question
Please I need Help in Macroeconomics
Problem 1: (25 pts) A fictive economy is characterized by the following set of equations: C 100 0.9 YD IP 200 G 1000 T 1000 a. Calculate the equilibrium level of output. b. Based on your analysis in Part (a), calculate the levels of consumption and saving that occur when the economy is in equilibrium. c. Now suppose planned investment rises by 100. Calculate the new equilibrium level of income. Given your answer, what is the size of the multiplier? d. What is the size of the tax multiplier for this economy?Explanation / Answer
a) Equilibrium Output: Y = C + I + G
Since YD = Y - T,
Hence Y = 100+0.9(Y-1000) + 200 + 1000
=> 0.1Y = 100 - 900 + 200 + 1000 => Y = 4000 = Answer
b) Consumption = 100+ 0.9(4000-1000) = 2800
=> Level of consumption = 2800/4000 = 0.7 = Answer
Hence saving = 4000-2800 = 1200
Level of saving = 1200/4000 = 0.3 = Answer
c) Ip = 300.
Hence Y = 100+0.9(Y-1000) + 300 + 1000
=> Y = 5000 => C = 100 + 0.9*(5000-1000) = 3700, Savings = 1300
Level of savings = 3700/5000 = 0.74
Hence multiplier = 1/(1-0.74) = 3.846 = ANswer
d) Tax per 4000 of C = 1000.
tax level = 1000/4000 = 0.25
Hence Tax multiplier = 1/(1-0.25) = 1.333 = ANswer