Question

Modell deals with the simplest possible conditions of a closed economy (no exports or imports) with no government, no corporate savings, and no induced investment In this economy Yo = Y; C = 60+ (9/10) Y 1 = 40. Use this information to complete the table below, and write in answers to questions 1-5. Total Output (GDP) Yo C Total Demand C+1 800 800 780 820 900 900 870 910 1000 1000 1100 1100 1050 1090 1200 1200 1140 40 1180 1. Equilibrium GDP (Y) for Modell is because 2. Algebraic solution for equilibrium GDP (Y) in Model 1 (show your work). You know that Yo-Y in this model and that, in this model, equilibrium is where Y=C+I, SO: Y 60+ (9/10) Ya + 40 Y 60+ (9/10) Y+40 Y = 100+ (9/10) Y Y 3. Show how you calculate the multiplier for Model I. 4. If you wanted the equilibrium value of GDP to move to 1200 in Modell, it would be necessary to change autonomous spending the constant in the equation Y = 100 + (9/10) Y) to This is a change of from its previous value. 5. If you wanted the equilibrium value of GDP (Y) to move to 500 in Modell, it would be necessary to change autonomous spending (the constant in the equation Y = 100 + (9/10) Y) to This is a change of from its previous value.

Answer 1

Using the equation of consumption to complete the table:

C = 60 + 9/10 * Y

when Y = 1000,

C = 60 + 9/10 * 1000

C = 960. and I = 40 and C + I = 1000.

When Y = 1100, C = 1050, I = total demand - C

I = 1090 - 1050 = 40.

1. Equilibrium for the model is where the Y = Yd = total demand = $1000.

Because the income equals the expenditure.

2. Y = 60 + 9/10 * Y + 40

Y = 100 + 9/10 * Y

Y - 9/10 * Y = 100

Y/10 = 100

cross multiplying,

Y = 100 * 10

Y = $1000.

3. Multiplier = 1 / 1 - MPC

Multiplier = 1 / 1 - (9/10)

Multiplier = 10.

4. change the autonomous spending to 120. this is a change of 20 from the previous value.

Y = 120 + 9/10 * Y

Y - 9/10 * Y = 120

Y/10 = 120

Y = 120 * 10 = $1200.

5. change the autonomous spending to 50. this is a change of $50 from the previous value.

Y = 50 + 9/10 * Y

Y - 9/10 * Y = 50

Y/10 = 50

Y = 50*10 = $500.