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 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
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.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Economics 102: MacroeconomicsChapter 4 / Lesson 3