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Suppose that the economy is characterized by the following behavioral equations, in which all macroeconomic aggregate...

Suppose that the economy is characterized by the following behavioral equations, in which all macroeconomic aggregate are measured in billions of Namibian dollars, N$:

C = 160 + 0.6Yd

I = 150

G = 150

T = 100

Solve for

  1. Equilibrium GDP (Y)
  2. Disposable income ( Yd )
  3. Consumption spending ( C )
  4. Multiplier for government expenditure and interpret it.
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Answer #1

Answer

a.
AD= C+I+G
AD=Y
Y=160+0.6(Yd)+150+150
Yd=Y-T
Y=160+0.6(Y-T)+150+150
Y=160+0.6(Y-100)+150+150
Y=460+0.6Y-60
0.4Y=520
Y=1300
b.
Yd=Y-T
Yd=1300-100
Yd=1200
c.
C = 160 + 0.6Yd
C=160+0.6(1200)
C=880
d.
m = 1/(1 - c)
c=C/Y
c=880/1300=0.67
m=1/(1-0.67)=3.03

An increase in the government expenditure will create multiple rounds or ipples of stimulus which will lead to an increased effect on GDP.

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