Suppose that the economy is characterized by the following equations: C = 160 + 0.6Yd I...
Suppose that the economy is characterized by the following equations: C = 160 + 0.6Yd I = 150; G = 150; and T = 100: For the economy in the last problem above:
(a) Assume that output is equal to 900. Compute total demand. Is it equal to output? Explain.
(b) Assume that output is equal to 1000. Compute total demand. Is it equal to output? Explain.
(c) Assume output is equal to 1000. Compute private saving. Is it equal to investment? Explain
Homework Answers
Total demand = C + I + G
Yd = Y - T
a) Total demand = 160 + 0.6 x (900 - 100) + 150 + 150 = 940
No demand is not equal to output, Demand exceeds the output (there would be shortfall of inventory)
b) Total demand = 160 + 0.6 x (1000 - 100) + 150 + 150 = 1000
Demand is equal to output, Demand equals the output (equilibrium)
c) No private saving is not equal to investment
Yd = C + S
S = Yd - C = 1000 - 100 - 160 - 0.6 x (1000 - 100) = 200
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