Purchase Solution

Hypothetical Economy with Fixed Price Level and Interest Rates

Not what you're looking for?

Ask Custom Question

Assume the following equations (in billions of dollars) describe a hypothetical economy where both the price level and interest rates are fixed.

C=110 + 0.75(YD)
YD= Y - NT
NT = 0.2Y
I = 175
G = 80
EX = 70
IM = 30 + 0.1Y

*NOTE: NT means net taxes. YD means disposable income.

i) What is the equilibrium level of income (real GDP) in this economy?

ii) Calculate the autonomous expenditure multiplier for this economy

iii) Graph the aggregate expenditure function to show autonomous aggregate expenditure, the slope of the aggregate expenditure function and equilibrium income

iv) What changes in government spending would be necessary to move the present equilibrium GDP (calculated for part (i) above) to the full employment level of 1000

v) What changes in transfer payments would be necessary to move the economy towards full employment GDP of 1000.

Purchase this Solution

Solution Summary

Describe a hypothetical economy where both the price level and interest rates are fixed.

Solution Preview

i) Equilibrium level of income must be computed as
<br>Y= C + I + G + EX - IM
<br>Y= 110 + 0.75(Y- 0.2Y) + 175 + 80 + 70 - 30 - 0.1Y
<br>Y - .75Y + .15Y + .1Y = 110 + 175 + 80 + 70 - 30
<br>Y ( 1-.75 +.15 + .1) = 405
<br>Y= 405*(1/0.5)
<br>Y = 810
<br>ii) The autonomous expenditure multiplier is given by (1/0.5) = 2. Thus, each time autonomous ...

Purchase this Solution

Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.