Question

Question 4

Suppose you have the following information about a closed economy:

C = 50 + 0.80 (Y – T)

I = 200

G = 100

a) Find out the equilibrium level of income.

b) Suppose G increases to 125 what is the new equilibrium level of income?

c) What level of G is needed to achieve a target income of 200?

Answer 1

In closed economy:

$T=G$

a)

$AD=Y$

$Y=50+0.8(Y-T)+200+100$

$0.2Y=270$

$Y=1350$

b)

$0.2Y=275$

$Y=1375$

c)

$Y=200$

$200=50+0.8(200-G)+200+G$

$0.2G=-210$

$G=-1050$