Question

Assume the following macroeconomic variable in $ billion) for an economy: Y-national income - Aggregate Expenditures Aggregate Expenditures Consumption + Investment + Government Spending + Net Export Assuming that the full employment level in $6,000 billion, determine the change in government spending needed to reach full employment. (Hint: calculate the current GDP then calculate aggregate expenditures using national income of $6,000 and find the difference) Consumption (80% of disposable or after tax income) + $300 C = $300 +0.8 (Y-T) Tax (20% of income) I = 0,2Y Investment $800 Government Spending $700 Exports $400 Imports 0.1zY - T $440 $440 $560

Answer 1

At Y=6000,

C=300+0.64Y=300+0.64*6000=300+3840=4140

Imports=0.08*Y=0.08*6000=480

Aggregate expenditure=4140+800+700+400-480=5560

Full employment G=6000-5560=440

New G=700+440=1140

Y=300+0.64Y+800+1140+400-0.08Y

Y=2640+0.56Y

Y=2640/0.44=6000

So G must Increase by 440 to reach full employment { no need to calculate current gdp}