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Level of Equilibrium of GDP

Use the following Keynesian Macroeconomic model to answer the questions followed:

Use the following table of consumption data of Bush Garden economy to answer the questions followed 30 pts

GDP(Y) Consumption(C) Saving(S) MPC MPS
$0 100
100 175
200 250
300 325
400 400
500 475
600 550
700 625

a. Fill out the rest of the columns of the above table

b. Write down the consumption function (Hint: Make sure you use the appropriate numbers from the above table as the true representation of the observed data)

c. Write down the saving function (Hint: Make sure you use the appropriate numbers from the above table as the true representation of the observed data)

d. What is the value of the Keynesian multiplier?

Suppose you also have the following additional macroeconomic data of Bush Garden economy in the context of Keynesian Expenditure model.

C = a +bY (use this equation by taking the data from the above table) and answer a through d

C = Consumption function; a = intercept; b = MPC

I = Investment function = 100
G = Government expenditure = 120
X = Export = 30
M = Import = 50

Yf = Full employment GDP = 2,000

The equilibrium condition is Y (aggregate supply) = AD = C+I+G+X-M

Using the above data including the data on consumption function you have used for answering a thru c, answer the following questions:

e. What is the level of equilibrium GDP?

f. What is the GDP gap?

g. Is Bush Garden economy in recession or inflation? What is the recessionary or inflationary gap?

h. If the fiscal policy objective of the Government is to conduct government expenditure policy to stabilize the above situation, how much government expenditure needs to be added (for recessionary situation) or reduced (for inflationary situation) and why?

Solution Preview

1 2 3=2-1
GDP(Y) Consumption(C) Saving(S) MPC MPS
0 100 -100 NA NA
100 175 -75 0.75 0.25
200 250 -50 0.75 0.25
300 325 -25 0.75 0.25
400 400 0 0.75 0.25
500 475 25 0.75 0.25
600 525 75 0.75 0.25
700 600 100 0.75 0.25

C= a+bY a=100 b=MPC ...

Solution Summary

The solution contain step by step explanation to find out Equilibrium GDP and also links with Fiscal policy. The solution has detailed text and Excel file.

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