Part Two: Problem. Instructions: Solve the following problems mathematically. Sh

Question

Part Two: Problem. Instructions: Solve the following problems mathematically. Show all your work on the pages provided a) (15 points) Given the following information, and using our model of the goods and services market, solve for the equilibrium level of output. (Show all your work.) C=100 + .90 (Ya) T=250 1 = 150 G=200 b) (10 points) Is there a government deficit? Calculate the amount of the deficit or surplus, then balance the budget by changing government spending. By how much does output change? (Show all your work.)

Explanation / Answer

a) Y = C + I + G

Y = 100 + 0.9(Y - T) + 150 + 200

Y = 450 + 0.9(Y - 250)

Y = 450 + 0.9Y - 225

Y - 0.9Y = 225

0.1Y = 225

Y = 2250

b) Government deficit = Government spending - Taxation = 200 - 250 = - 50

No, there is government surplus.

Government surplus = 50

Increase in government spending by $ 50 causes balance budget.

Change in Y = Change in G/ (1 - MPC)

Change in Y = 50/(1 - 0.9)

Change in Y = 500

So, output change by $ 500.

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