Part II Aggregate demand and equilibrium output determination in the closed econ

Question

Part II Aggregate demand and equilibrium output determination in the closed economy 6. Suppose that there is no private investment, no government sector, no international trade in an economy. The aggregate demand is equal to the sum of households' consumption only. If the autonomous part of consumption ( coo is 30 and the marginal propensity to consume ( c is 0.8, what is the multiplier? Starting from the AD equation, show the derivation procedure and the final equilibrium output equation defined as a function of the multiplier. 7. Draw a graph that shows the relationship between aggregate demand and aggregate output, with a proper axis label, the intercept and slope. 8. Suppose that there is no government sector and no international trade in the economy. If the autonomous part of consumption (Co is 30, the marginal propensity to consume (c is 08, and the given fixed private investment ( I=1 ) is 60, what is the multiplier? Starting from the AD equation, identify the final equilibrium output equation that shows the multiplier. 9. Draw a graph that shows the relationship between aggregate demand and aggregate output, with a proper axis label, intercept and slope. 0. Suppose now that the government imposes a lump sum tax, T, on the gross income. If the consumption demand is described by CtY where YY-T+TR and the private investment is given as 1=1 , what is the multiplier. Starting from the AD equation, derive the equilibrium output equation that shows the multiplier.

Explanation / Answer

6. Multiplier = 1/(1-mpc) = 1/(1-0.8) = 1/0.2 = 5

Equilibrium condition;

Y = C

Y = 30 + 0.8Y

Y - 0.8Y = 30

0.2Y = 30

Y = 30/0.2 = 150

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