Question

Equations for C, I, G, and NX are given below. If the equilibrium level of output is $21,500, what will the new equilibrium level of output be if investment increases by 1,000? C = 1,500 + CY 1 = 1,000 G = 2,000 NX = -200 a) Not enough information is given to answer the question. Ob) $22,000 Oc) $21,500 d) $22,500

Answer 1

i) from National Income Accounting, we have i Y= consumption (0) + Investment f1) + Government Expenditure (G) + Net Exporte (Nx), where, y: Equilibrium level of output. * , 1 = 1500 + c + 18 BD + 2 6 60 - 200 • -> (1-c) y = 43001;. i. Putting the value of Y = $21,500, we get a 21500 4300 1-ci ! =.5 = -35='50 = , -)C==08: San =) C=0.8' oo Marginal propensity to consome: C =0.8. Here, if we note, we can see that investment is autonomous, ice, it is independent (of interest rate) and heme determined ex.ogeneously.

is the associated multiplier will be given by : AY AT I-C where, I change in autonomous investment Ay change in equilibrium output int, AJ = 1000 and 21 = 0.8, we have : it !..1000 . AY = 1-CM-.- 1-0.8. , => AY = 5000 in the new equilibrium level of output will be $ 121,580 + 8%) = $(21,500 +5000) = $ 26,500 [Note. The options provided does not match with the answer yielded There can be one possibility, that, if the increase in investment is by 100, then the change in output will be - 100 = 500 4y= 21 - T-c : -0.8 :>> AY = 500 In that case, therefore, the new equilibrium level of output will be : $ 21500 +500) = $22,000 7. Coption (b.))

2) Autonomous collaumption is Mat part of the consumption which does not depend on income. Hence, in the consumplion fumetion i C:1,250+ 0.8 the autonomusu lenel of consumption expenditure is: 1250 (1.) 3) The short-run aggregale supply curve shije left in the long run, following an increase in aggregate demand because (c) Workers and firmes adjust their expectations of wages and prices upward, and they push for higher wage and prices : This is because when there is an upward revision of prices and wages, the producers cost of production increases and heme they decide to cortail production, thereby shifting the short-sun aggregate supply crue to the left] 4 If innestment spending decreases, then, in the short-run, aggregate demand decreases shifting the AD come to the left from AD, to ADO) and the shortaron equilibrium takes place at B. But in the long-run, the expected price level adjusts and is revised downward which induces the short-run aggregate supply curne to shift to the right from SRAS, T SŘAS,) and the long-run equilibrium, thus, takes place at point A (intersection of ADR and SRA $2). Therefore, the eventual long-run equilibrium will be at :A.