Consider an economy in which the consumption function takes the following simple

Question

Consider an economy in which the consumption function takes the following simple algebraic form: C 300+ 0.75DI. Taxes are foxed at $1,200 and other numbers are as given in the following table. Calculate the value of consumption spending for each level of disposable income. Then calculate the value of total expenditure and find the equilbrium level of GDP. (Hint: Remember that disposable income is GDP minus taxes: DI Y-T--Y .. 1,200 ) Income Consumption Investment Government Spending Net Exports Total Expenditure 4,800 900 1,300 1.300 1,300 1,300 1,300 1,300 1,300 -100 -100 -100 -100 -100 -100 5,.200900 5,500900 6.00090 6,400 900 6,800 900 7,20090 -100 ] Given these data, the equilibrium level of GDP is This equilibrium is the equilibrium in the following table GDP Consumption Investment Government Purchases Net Exports Total Expenditure 4,800 900 900 900 900 900 900 900 1.300 1,300 1.300 1,300 1.300 1.300 1,300 -100 -100 -100 -100 -100 -100 -100 5,100 5,400 700 6,000 6.300 6,600 6,900 3,000 5,200 3.00 5,600 6,000 6,400 6,800 7.200 3.600 3.900 4.200 4,500 4,800

Explanation / Answer

C = 300 + 0.75(Y-1200) {as T = 1200}

So putting corresponding Y = income we get corresponding consumption

i.e 3000,3300,3600,3900,4200,4500,4800

now expenditure = C + I + G + NX

i.e. 5100,5400,5700,6000,6300,6600,6900

Equlibrium GDP = 6000 where Expenditure = Income

this expenditure is 6000 in the table

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