Question

Question 5: Equilibrium in the goods market Use the following information to answer the question(s) below. C=250+.75YD I = 250 1. Y to video Mosantoni vigou nomor G= 200 que vol 1) y lo s odabrow ni inte bus T= 200 (i.e. taxes are autonomous or exogenous) where C=Consumption spending; Yp=disposable income; I=investment spending; G- government spending: and T-taxes paid minus government transfers received by consumers. Remember that Yp=Y-T). (a) Determine the equilibrium level of output and the equilibrium level of consumption for the above economy. (b) Suppose that the government increased its expenditure by 20, what would the new equilibrium level of output be? (c) Suppose that the government increased taxes by 40, what would the new equilibrium level of output be? (d) Now suppose that the government was forced to keep a balanced budget so that G-T. What effect would a balanced-budget increase of government expenditure by 40 have on equilibrium output for this economy? (e) Based on your results in part (d), what is the balanced budget multiplier?

Answer 1

Given C=250+.75Y_D

I=250

G=200

T=200

(a) We know, Y=C+I+G

Y=250+.75(Y-200)+250+200

Y=700-150+.75Y

.25Y=550

Y=(550/.25)=55000/25=2200 (Equilibrium level of output)

C=250+.75(Y-200)

C=250+.75(2200-200)

C=250+.75*2000=250+1500=1750 (Equilibrium level of consumption)

(b) Suppose G=220

Now, Y=C+I+G

Y=250+.75(Y-200)+250+220

Y=720-150+.75Y

Y=(570/.25)=2280 (New equilibrium level of output)

(c) New T=240

Y=C+I+G

Y=250+.75(Y-240)+250+200

Y=700-180+.75Y

Y=(520/.25)=2080 (New equilibrium level of output)

(d) New G=T=240

Y=C+I+G

Y=250+.75(Y-240)+250+240

Y=740-180+.75Y

Y=(560/.25)=2240  

(e) In case of (d) where G=T=240 the balanced budget gives a higher output at 2240 compared to the previous output at 2080 with only rise in T.