Answer to Question #303347 in Finance for Lukas

Question

Given that 𝐶 = 100 + 0.8𝑌; 𝑀 = 150 + 0.2𝑌; 𝐼 = 100 𝑎𝑛𝑑 𝑋 = 350,

a) Determine the equilibrium income

b) Show the results on two graphs with (i) Injections and leakages on the vertical axis

(ii) Net injections and net domestic leakages on the vertical axis

c) Determine the new equilibrium and show on graph when there is;

i. An increase in X and I of 200

ii. A decrease in M of 100

iii. A decrease in S and M of 100

Answer 1

A)Most simply, the formula for the equilibrium level of income is when aggregate supply (AS) is equal to aggregate demand (AD), where AS = AD.

Adding a little complexity, the formula becomes Y = C + I + G(X-M), where Y is aggregate income, C is consumption, I is investment expenditure, and G is government expenditure

$Y=100+0.8Y+100+(350-150)$

$Y-0.8Y=400$

$Y(0.2)=400$

$Y=2000$

B)

ii)

c)

i)

Y=3000

ii)

Y=2500

iii)

Y=2000