# Suppose you are given the following information about an economy: consumption function of C = 15...

## Question:

Suppose you are given the following information about an economy: consumption function of C = 15 + 0.7Y, investment equal to 8, government expenditure equal 12, exports equal to 20, and import function of M = 0.2Y. Use this information to answer questions 23 to 25. 23) What is the consumption expenditure in equilibrium in this economy? a) 77. b) 92. c) 62. d) 35. 24) What is the multiplier for this economy? a) 1. b) 2. c) 0.5. d) 3.3. 25) What is the equilibrium real GDP for this economy? a) 110. b) 70. c) 510. d) 55.

## Equilibrium GDP:

The gross domestic product is the value of all the final output that is produced in an economy or within the borders of a country within a given period of time. There are various methods which are used in the estimation of the equilibrium GDP. Some of the most commonly used approaches in the calculation of GDP are: the expenditure approach which sums up all the spendings in the economy, the income approach which involves calculating the total income generated by all the goods and services and the value-added approach.

#### Question 23):

What is the equilibrium real GDP for this economy?

The correct answer is: a) 110.

Equilibrium GDP using the expenditure approach in an open economy is calculated as:

• {eq}Y = C + I + G + (X - M) {/eq}

From our question:

• {eq}C = 15 + 0.7Y {/eq}
• {eq}I = 8 {/eq}
• {eq}G = 12 {/eq}
• {eq}X = 20 {/eq}
• {eq}M = 0.2Y {/eq}

Substituting these values and equations into the GDP equation:

• {eq}Y = 15 + 0.7Y + 8 + 12 + (20- 0.2Y) {/eq}
• {eq}0.5Y = 55 {/eq}
• {eq}Y^* = \dfrac{55}{0.5} = 110 {/eq}

#### Question 24):

What is the consumption expenditure in equilibrium in this economy?

The correct answer is: b) 92.

At the equilibrium income, the consumption spending is equal to:

• {eq}C = 15 + 0.7(110) = 92 {/eq}

#### Question 25):

What is the multiplier for this economy?

The correct answer is: d) 3.3

The government spending multiplier is calculated as:

• {eq}\dfrac{\Delta Y}{\Delta G} = \dfrac{1}{1 - MPC} {/eq}

From the consumption function, the marginal propensity to consume is:

• {eq}MPC = \dfrac{\Delta C}{\Delta Y} = 0.7 {/eq}

Therefore, the spending multiplier is equal to:

• {eq}\dfrac{\Delta Y}{\Delta G} = \dfrac{1}{1 - 0.7} = 3.33 {/eq}