Homework Answers
(1)
S = -100 + 0.1Y
Y = C+S
=> C = Y - S
=> C = Y - (-100 + 0.1Y)
=> C = Y + 100 - 0.1Y
=> C = 100 + 0.9Y (Consumption function)
AE = C + I + G
=> AE = 100 + 0.9Y + 400 + 200
=> AE= 700 + 0.9Y
At equilirium, Y = AE
=> Y = 700 + 0.9Y
=> (Y - 0.9Y) = 700
=> 0.1Y = 700
=> Y = (700 / 0.1)
=> Y = 7000
Equilibrium level of income (Y) is 7000.
Answer: Option (D)
--------------------------------
(2) Increase in autonomous investment by 200 will increase the AE by 200 at each level of output.
Answer: Option (B)
-----------------------------
(3) AE = 700 + 0.9Y
Note: Refer Part (1)
Answer: Option (C)
-------------------
(4) Potential output is 4000
Actual equilibrium output is 7000.
Actual equilibrium output is higher than the potential output, implies there is inflation.
Answer: Option (B)
------------------
(5) C = 100 + 0.9Y
Note: Refer Part (1)
Answer: Option (B)
Add Answer to:
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