Economic Policy - Global Environment. See attached file for full problem description.
1. There are two ways of measuring GDP, the expenditure approach and the savings investment approach. The expenditure approach involves adding up the market value of all domestic expenditures made on final goods and services in a single year.
Thus we have AE = C + I + G +(X-M) where AE= GDP
20+ 0.8Y+200+ 100 = GDP
Where Y equals GDP-T
The equilbrium GDP will occur where
20+ 0.8(GDP-50)+200+ 100 = GDP
20 +.8GDP-40+300= GDP
0.2 GDP = 280
The MPC is the percentage of income people spend. It is calculated by MPC = ΔC / ΔYD
To calculate MPC we need to know how consumers spend the last dollar they receive.
If consumers spend 80 cents out of the last dollar, then MPC = $0.80/$1.00 = .80.
We are given a consumption function C = 20 + .8Y. This means that 20 is not dependent on income, and consumers also spend an additional .8 of each dollar earned. This is the MPC.
GDP can also be calculated from the savings investment approach, which uses the equation GDP = C + S + T. We calcalate savings using the equation I = S - (G - T)
Thus we have
200 = S -(100-50)
S = 200 + 50 = 250
So GDP = 20 + 0.8 (GDP-50) + 250 + 50
GDP = 320 + .8 GDP -40
.2 GDP = 280
GDP = 1400
If G is 120 and T is 70, we can calcuate GDP by using either of the formulas with the new numbers.
GDP = 20+.8 (GDP - 70) + 200 + 120
.20 GDP = 340 -56
GDP = 1420
This represents an increase in GDP, caused by the AD curve shifting outward from AD2 to AD1. See the attached file chart.
For part c, you simply need to solve for the G variable, given GDP. Thus the equation you're solving is:
1750 = 20 + .8 (1750) + 200 + G
2. We have to calculate required ...