Explore BrainMass
Share

Explore BrainMass

    Equilibrium Level of GDP

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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
    3710
    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

    © BrainMass Inc. brainmass.com October 9, 2019, 6:52 pm ad1c9bdddf
    https://brainmass.com/economics/investments/equilibrium-level-gdp-100615

    Solution Summary

    The equilibrium level of GDP is discussed.

    $2.19