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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 Preview

    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 Summary

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

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