Question

Assume an economy does not trade with the outside world. In a given fiscal year, household 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 output is equal to aggregate spending.
1.Determine the value of the multiplier.
2. Find the equilibrium level of output

Answer 1

$Consumption =0.8$

$MPS=1-0.8=0.2$

$Multiplier =$ $1\over MPS$

$=$ $1\over 0.2$

$=4$

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Equlibrium out put

$Y=C+I+G-T$

$Y=600+900+700-450$

$Y=1750$

$Y*=Y-T$

$Y*=1750-700$

$Y*=1050$