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Finding equilibrium level of output

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The following equations describe the commodity market:

C= 100+0.9*DI (1), DI= Y-T (2), T= 0.2*Y (3), I=140 (4), G=200(5), X=200+0.18*Y (6), IM=100 (7), Y=C+I+G(X-IM) (8)

A. Determine the equilibrium level of output

B. Suppose that government spending increases by 20 units. Determine the change in the equilibrium level of output.

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Solution Summary

Solution describes the steps to find out equilibrium level of output with the help of relations given.

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Solution:

A. Determine the equilibrium level of output

Refer to relation 2 in question, we get
DI=Y-T
But equation 3 gives T=0.2Y. So,
DI=Y-0.2Y=0.8Y

Put value of D1 in C=100+0.9DI
C=100+0.9*0.8Y=100+0.72Y --------------(9)

We ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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