# Disposable Income

The question asked that suppose that the consumption function in a particular economy is given by the following table:

Disposable Income Consumption Expenditure

(Billions of Dollars) (Billions of Dollars)

400 350

500 425

600 500

700 575

800 650

Assuming that no taxes are imposed (and that net exports are zero), what is the equilibrium value of GDP if government expenditures are $50 billion and inteneded investment is $50 billion?

The second question asked to use data from the first question to fill in the blanks. Suppose taxes are 20 percent of GDP.

GDP Consumption of Expenditure

(Billions of Dollars) (Billions of Dollars)

____ 350

____ 425

____ 500

____ 575

____ 650

The third question asked to use data from the second question, is the government's budget balanced at the equilibrium level of GDP if government expenditures are $50 billion and intended investment is $50 billion? If not, how big is the surplus or defict?

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Question 1

Disposable Income is what is left of GDP after the government collects the taxes:

Disposable Income = (1-T)*Y

where T is the tax rate (for example, 0.2 for 20%) and Y is the GDP. Since we're told that there are no taxes, then The disposable income is equal to the GDP.

For this economy to be in equilibrium we need:

Y = C + I + G + NX

where Y is the GDP, C is consumption, , I is the intended investment, G is gov't expenditure and NX represents the net exports. Furthermore, we're told that:

NX = 0

I = 50

G = 50

So the equilibrium becomes:

Y = C + 50 + 50 + 0

Y = C + 100

Finally, we check the table to see where GDP (recall it's the same as Disposable Income here) is equal to Consumption + 100. Clearly this happens when disposable income is 600. Consumption in this case is 500 (500 + 100 = 600). Therefore, the equilibrium value of GDP is 600 billion dollars. In ...

#### Solution Summary

Disposable Income is determined.