Question

If C=700+0.8Yd, I= 400, Tax=10%, & G= 200, then:

Derive equation for AD
Determine equilibrium value of output.
Calculate value of multiplier
Repeat first 3 parts if Govt. spending is increased to 300
Show changes through graph..

Answer 1

1)

$AD=C+I+G$

$Yd=Y-T*Y$

$AD=700+0.8(Y-0.1Y)+400+200=1300+0.72Y$

2)

$AD=Y$

$Y=1300+0.72Y$

$Y-0.72Y=1300$

$0.28Y=1300$

$Y=1300/0.28=4642.86$

3)

M-value of multiplier 

$M=1/0.28=3.57$

4)

$AD=1300+300+0.72Y=1600+0.72Y$

$Y=1600+0.72Y$

$Y=1600/0.28=5714.29$

$M=1/0.28=3.57$

5)