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Equilibrium Level of Income or GDP

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Assume that the consumption schedule for a private open economy is such that consumption C=50+0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig=30 and Xn=10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures = C + Ig + Xn.

a. Calculate the equilibrium level of income or real GDP for this economy.

b. What happens to equilibrium Y if Ig changes to 10? What does this outcome reveal about the size of the multiplier?

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a. Computation of the equilibrium level of income:

C= 50+.80Y

Y = C + Ig + Xn
Y = 50+.80Y+30+10
Y-.80Y = 50 + 30 + 10
.20Y = 90
.20Y/.20 = 90 ...

Solution Summary

The solution shows the computation of the equilibrium level of income or GDP. It shows the computation of the income given a change in investment.

See Also This Related BrainMass Solution

Equilibrium Level of GDP

1. Find the equilibrium level of GDP demanded in an economy in which investment is $250, net exports are zero, government purchases and taxes are both $400, and the consumption function is as follows: C = 250 +.5 DI

2. Now referring to the problem above, Add the following aggregate supply and demand schedules.

Price level Aggregate Demand when investment is $260 Aggregate supply
90 when investment is $240 4060 3660
95 $3860 4030 3730
100 3830 4000 3800
105 3800 3970 3870
110 3770 3940 3940
115 3740 3910 4010
a. Notice that the difference between Columns 2 and 3, which show the aggregate demand schedule at two different levels of investment, is always $200. Discuss how this constant ga of $200 relates to your answer in number 1.
b. Find the equilibrium GDP and the equilibrium price level both before and after the increase in investment. What is the value of the multiplier? Compare that to the multiplier you found in problem 1.

1. Consider an economy in which tax collections are always $400 and in which the four components of aggregate demand are as follows:
GDP Taxes Disposable income consumption investment gov. purchases exports minus imports
$1360 $400 $960 $720 $200 $500 $30
1480 400 1080 810 200 500 30
1600 400 1200 900 200 500 30
1720 400 1320 990 200 500 30
1840 400 1440 1080 200 500 30

Find the equilibrium of this economy graphically. What is the marginal propensity to consume? What is the multiplier? What would happen to the equilibrium GDP if government purchases were reduced by $60 and the price level remained unchanged?

2. Consider an economy similar to that in the preceding question in which investment is also $200, purchases are also $500, net exports $30 and the price level is also fixed. But taxes now vary with income and, as a result, the consumption schedule looks like the following:

GDp Taxes Disposable income consumption
$1360 $320 $1040 $810
1480 360 1120 870
1600 400 1200 930
1720 440 1280 990
1840 480 1360 1050

Find the equilibrium graphically. What is the marginal propensity to consume? What is the tax rate? Use you diagram to show the effect of a decrease of $60 in government purchases. What is the multiplier? Compare this answer to your answer in Question 1. What do you conclude?

Below is a list of domestic output and national income figures of a given year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches. The results you obtain with the different methods should be the same.
Personal consumption expenditures $245
Net foreign factor income earned in the U.S. 4
Transfer payments 12
Rents 14
Consumption of fixed capital (depreciation)
Social security contributions 20
Interest 13
Proprietors' income 33
Net exports 11
Dividends 16
Compensation of employees 223
Indirect business taxes 18
Undistributed corporate profits 21
Personal taxes 26
Corporate income taxes 19
Corporate profits 56
Government purchases 72
Net private domestic investment 33
Personal saving 20

a. Using the above data, determine GDP by both the expenditures and the income approaches, Then determine NDP.
b. Now determine NI in two ways. first, by making the required additions or subtractions from NDP; second, by adding up the types of income that make up NI.
c. Adjust NI from part b as required to obtain PI
d. Adjust PI from part c as required to obtain DI

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