Question

Problem 11-7 (Algo) Refer to columns1 and 6 In the table below. Aggregate Expenditures Real Domestic DI), Billions 5300 5350 5400 5450 $500 $550 5600 $650 Aggregate Exports Billions Output, (GDP Imports, BillionsBillions Net ExportsExpenditures Private Closed Economy, Billions 5340 S380 5420 5480 $500 $540 $580 $620 S30 S30 S30 S30 S30 S30 S30 S30 S20 S20 S20 S20 S20 S20 S20 S20 510 510 510 510 510 510 510 510 Private Open Economy, Billion:s S350 390 S430 S470 S510 550 S590 S630 Instructions: Round your answer to the nearest whole number Incorporate government Into the table by assuming that It plans to tax and spend $28 billon at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does not Induce a shift In the private aggregate expenditures schedule What is the change In equilibrlum GDP caused by the addition of government? billion roblem 11-8 (Algo) DVANCED ANALYSIS Assume that the consumption schedule for a private open economy is such that consumption Is C=80 + 0.75 Y ssume further that planned Investment lg government spending G and net exports Xnare Independent of the level of income. lg 50, G-0 and Xn= 10. Recall also that, in equilibrium, the real output produced Mis equal to aggregate expenditures nstructions: Round your answers to the nearest whole number. . Calculate the equlbrlum level of Income or real GDP for this economy. Equilibrium GDP Y) . What happens to equlibrium GDP if ig changes to 30? Equilibrium GDP (Y) What does this outcome reveal about the size of the multiplier? The figure below shows the Investment demand curve for a fictitious country. Use the information In the figure to answer the question below nvestment Demand 16 2 15 14 13 A 12 드 11 10 E 7 Investment demand curve 10 20 30 40 50 Investment (billions of dollars) If the real Interest rate Is currently 8 percent and real GDP IS $120 billion, what will be the level of planned Investment for this country? billion

Answer 1

7 6+7 Aggregate expenditure Government expenditure GDP (open economy) 300 350 400 450 500 550 600 650 350 390 430 470 510 550 590 630 28 28 28 28 28 28 28 28 378 418 458 498 538 578 618 658

Earlier, the equilibrium was obtained at GDP = 550 (yellow). Now, it is obtained at GDP = 650 (approximately 658) (orange).

Y = 80 + 0.75 Y + 60 + 0 + 10

=> 0.25 Y = 150

=> Y* = 600

If Ig = 30, 0.25 Y = 120

=> Y* =480

Multiplier = change in income/ change in investment = (600 - 480)/ (60 - 30) = 120/30 = 4

If real interest rate is 8 per cent, from the given figure, investment is 12 billion dollars.