Suppose an imaginary economy is represented by the following equations: GDP= C +
ID: 1187075 • Letter: S
Question
Suppose an imaginary economy is represented by the following equations:
GDP= C + I
C= $100 + 0.8 Y D
I = I Planned + I Unplanned
Iplanned = $200
AEplanned = C+IPlanned
(1) Calculate the income- expenditure equilibrium level GDP. Show your work.
(2) Suppose the level of planned investment spending (Iplanned) drops by $50 . What will the new equilibrium GDP be? Show your work
(3) With Iplanned back at the original level $200, suppose that autonomous consumption spending decreases from $100 to $60. What will the new equilibrium be? Show your work.
(4) Calculate the value of the multiplier.
Explanation / Answer
we know Y = C + S ; at equilibrium S = I ; Y = C + I ; also by keynes consumption function C = a +bY ;
hence using the above Y = 100 + 0.8Y + 200 ; solving we get Y = 1500 ; C = 1300 ;
if Iplanned dropped to 50 ; then Y changes to Y =100+0.8Y + 50 ;Y= 750 ; C= 700 ;
if autonomous consumption decreases to 60 ; Y = 60 +0.8Y + 200 ; Y = 1300; C = 1100 ;
value of multiplier = 1 / MPS = 1/ 1-0.8 = 1/ 0.2 = 5 answer