Question

Expert economists in the economy of Bongo estimate the following: Billion Bongos Real output/income Government purchases Total net taxes Investment spending planned) 100 Assume that Bongolers consume 80 percent of their disposable incomes and save 20 percent You are asked by the business editor of the Bongo Tribune to predict the events of the next forw months By using the data given and assuming that investment is constant, if the government of Bongo makes no changes, you predict that income wil GOP bilion Bongos (Enter your response as an integer) not change rise, since aggregate expenditure is less than output/income jovernment sector. They suggest outing government purchases by 25 bilion Bongos. You are asked to evaluate the impact of nal output fal, since aggregate expenditure is less than outputincome for your response as an integer and include a minus sign if necessary)

Answer 1

1. Ans - fall, since aggregate expenditure is less than output/income

Explanation:

Disposable income = 1200 - net taxes

= 1200 - 200

= $1000

Consumption is 80% of 1000

= $800

Aggregate demand = Consumption + investment + govt spending

= 800+200 + 100

= $1100

As the Aggregate demand is less than output/income so we can predict that in near future inventory will rise ( as here output is more than demand so goods remain unsold become inventory) and as inventory rise, production reduce and income falls.

2. Ans- If no changes, the economy of Bongo will settle at the level of GDP of 1,100 billion Bongos.

Explanation:

As aggregate demand is equal to output/income at the level of 1100 billion.

3. Ans - there will be a change in income = -125 billion Bongos

( negative sign shows that income reduce by 125 billion)

Explanation:

Now, if government purchases fall by 25 billion Bongos, level of income will fall by

[Multiplier = 1/mps = 1/0.2 = 5]

$\Delta$ G * multiplier = 25 billion *5 = 125 billion bongos.