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Suppose that the economy is characterized by the following behavioral equations: C = 1500 + 0.6...

Question:

Suppose that the economy is characterized by the following behavioral equations:

C = 1500 + 0.6 YD,

I = 560+0.2Y,

G = 1000,

T = 100 + 0.2Y.

Assume that G is now equal to 1600. Solve the equilibrium output, compute total demand. Is it equal to production? Explain.

Consumption:

Consumption means the commodity that is consumed by the consumer with the given level of money income. It derives the utility of an individual by consuming the commodity which shows the total satisfaction of the consumer.

Answer and Explanation:


As we know

GDP= Consumption + Investment + Government Expenditure + Net exports

Y= C+I+G+NX

Y=1500+0.6(Y-(100+0.2Y))+560+0.2Y+1000+0

Y=1500+0.6(Y-100-0.2Y)+560+0.2Y+1000

Y=1500+0.6(0.8Y-100)+560+0.2Y+1000

Y=1500+0.48Y-60+560+0.2Y+1000

Y=0.68Y+3000

0.32Y=3000

Y=$9375

If G=1600

Y= C+I+G+NX

Y=1500+0.6(Y-(100+0.2Y))+560+0.2Y+1600+0

Y=1500+0.6(Y-100-0.2Y)+560+0.2Y+1600

Y=1500+0.6(0.8Y-100)+560+0.2Y+1600

Y=1500+0.48Y-60+560+0.2Y+1600

Y=0.68Y+3600

0.32Y=3600

Y=$11250

Here, it is not equal to production that means as the aggregate demand rises due to an increase in the level of government expenditure. It means as the government expenditure rises from 1000 to 1600 then the aggregate income rises from $9375 to $11250. It shows that government expenditure increases by 600 then the aggregate income rises by $1875.


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
66K

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