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    Calculating the Equilibrium Output Level

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    The economy of Alphaland is represented by the following:
    C= 50 +0.25Yd
    T=1000
    G=1000
    I=1000

    (a) Calculate the equilibrium level of output. Graph your solution.
    (b) If the government spending increases by 50 what is the new equilibrium level of output? Use the government spending multiplier.
    (c) If the government increases taxes by 50 what is the new equilibrium level of output? Use the tax multiplier.
    (d) If the government increases taxes and spending by 50 what is the new equilibrium level of output?
    (e) Calculate the equilibrium level of output in case where taxes depend on income according to the following: T=-25+0.125Y.

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    Solution Preview

    Please refer attached file for solution.

    2. The economy of Alphaland is represented by the following:
    C= 50 +0.25Yd
    T=1000
    G=1000
    I=1000
    (a) Calculate the equilibrium level of output. Graph your solution.
    Planned expenditure is given by
    E= C + I + G
    E = 50+0.25Yd+1000+1000
    Put Yd=Y-T
    E = 2050+0.25(Y-T)
    E = 2050+0.25(Y-1000)
    E=2050+0.25Y-250
    E=1800+0.25Y
    We know that in equilibrium, Y=E
    Y=1800+0.25Y
    0.75Y=1800
    Y=2400
    Graphical Representation

    (b) If the government spending increases by 50 what is the new equilibrium level of output? ...

    Solution Summary

    This solution depicts the steps to estimate the equilibrium output level in different cases.

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