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Consumer Expenditure

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1. Imagine an economy in which consumer expenditure is represented by the following equation:

C=50 + .75DI, where DI=Y-T

Imagine also that investors want to spend 500 at every level of Income(I=500), net exports are (X-IM=0), government purchases is 300 and taxes are 200.

a. What is the equilibrium level of income?
b. If the full employment level of income is 3,000, is there a recessionary or inflationary gap? If so, how much?
c. What will happen to the equilibrium level of income if investors become optimistic about the country's future and raise their investment to 600?
d. Is there a recessionary or inflationary gap now? How much?
e. Graph the results of d

Question 2

Fredonia has the following consumption function:
C=100+.8DI

Firms in Fredonia always invest $700 and net exports are zero, initially. The government budget is balanced with spending and taxes both equal to $500 each.

a. Find the equilibrium level of GDP
b. How much is saved? Is savings equal to investment
c. Now suppose that an export-promotion drive succeeds in raising net exports to $100. Answer (a) and (b) under these new circumstances

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Solution Summary

The solution does a great job of answering the questions. The solution clearly explains the steps needed to get to an equilibrium level of GDP. It also talks about inflationary and recessionary gaps as well as unemployment. All the concepts are very well explained which makes it very easy for anyone with a basic understanding of economics to follow along. The attachment also contains a graph which makes it even easier to understand. Overall, an excellent response to the questions being asked.

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