QUESTION 6 5 points Save Answ Suppose that the behavior of households and firms

Question

QUESTION 6 5 points Save Answ Suppose that the behavior of households and firms in an economy is determined by the following equations C-30+0.75Y 25 The full employment level of output in the economy is: YFE 300 i. Find an expression for aggregate demand (This should take the form of AD-a +bY, where a and b are numbers) ii. What is the equilibrium level of output? YE iii. If, for some reason, income is equal to 300, would there be unintended inventory investment (yes or no)? iv. What would the excess inventory accumulation (+) or depletion be if income were equal to 300 v. What is the multiplier in this economy? vi. If intended investment increased by 10 (so the new level of intended investment were equal to IT-35), what would the new equilibrium level of output be? YE'

Explanation / Answer

(i)

Aggregate demand function is: AD = C + I

AD = 30 + 0.75Y + 25

AD = 55 + 0.75Y

(ii)

In equilibrium, AD = Y

Y = 55 + 0.75Y

0.25Y = 55

YE = 220

(iii) Yes.

When income = 300, there would be unintended inventory investment because aggregate demand (AD) is lower than income (220 < 300).

(iv)

Excess inventory accumulation = Income - YE = 300 - 220 = +80

(v)

MPC = 0.75 (From consumption function)

Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4

(vi)

In new equilibrium,

Y = 30 + 0.75Y + 35

0.25Y = 65

YE' = 260

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---