Question

Assume Joy economy does not trade with the outside world. In a given
fiscal year, households spent 80% of their disposable income on
consumption in addition to 600 consumption expenditure which is
independent of income. Total government expenditure of 900 was
supposed to be financed from a proportion tax levy of 40% on national
income and a lump sum tax of 450. Total private investment spending is
700. Given that aggregate spending is equal to aggregate output.
1. Determine the value of the multiplier
2. Find the equilibrium level of output

Answer 1

$Consumption =0.8$

$MPS =1-0.8=0.2$

$Multiplier =$$1\over MPS$

$1\over 0.2$

$=5$

Equlibrium out put

$Y=C+I+G-T$

$Y=600+900+700-450$

$Y=1750$

$Y*=Y-T$

$Y*=1750-700$

Y*=1050