Question

The small island nation of Kaboom is a simple economy with no government, no taxes, and no imports or exports. Kaboomers (citizens of Kaboom) are creatures of habit. They have a rule that everyone saves exactly 25 percent of income. Assume that planned investment is fixed and remains at 225 million Kaboomian dollars. Further assume that autonomous consumption (independent of Y) is zero, so consumption (C) is MPCXY. The following data are estimates for the island of Kaboom: • Real GNP (Y): 675 million Kaboomian dollars • Planned investment spending (1): 225 million Kaboomian dollars You are asked by the business editor of the Explosive Times, the local newspaper, to predict the economic events of the next few months. Based on the data given, you predict inventories will and the level of real GNP will Things will stop changing when Kaboom's economy will reach equilibrium when its real GNP = million Kaboomian dollars. (Enter your response as an integer.)

MULT CHOICE OPTIONS

1. decrease, stay unchanged, increase

2. increase, Stan unchanged, decrease

3.saving equals investment, output reaches a peak, planned investment is zero

Answer 1

Answer:

In a closed economy, the GDP is same as GNP. Thus, the income of the country is 675 million Kaboomian dollars. The planned investment is given at 225 million Kaboomian dollars. The savings are 25 percent of income. Then the consumption is 75 percent of the income.

Marginal propensiy to save (MPS) = 25% = 0.25
So, marginal propensity to consume (MPC) = 1 - MPS = 1 - 0.25 = 0.75
So, Consumption (C) = MPC*Y = 0.75Y and Investment (I) = 225 million.

At equilibrium, Real GNP (Y) = C + I
So, Y = 0.75Y + 225
So, Y - 0.75Y = 225
So, 0.25Y = 225
So, Y = 225/0.25 = 900

Real GNP = 900 million at equilibrium

Thus

Based on the data given, you predict inventories will decrease and the level of real GNP will increase

Things will stop changing when income is equal to aggregate demand.

Kaboom's economy will reach equilibrium when its real GNP = 900 million Kaboomian dollars.