Question

C = 50 + 0.80 (Y – T)
I = 200
G = 100
Find out the equilibrium level of income.
Suppose G increases to 125 what is the new equilibrium level of income?
What level of G is needed to achieve a target income of 200?

Answer 1

a)$C=50+0.80×(Y-T)=50+0.80Y-0.8×50=50+0.8Y-40=10+0.8Y;$

$Y=C+I+G;$

$Y=10+0.8Y+200+100; Y=310+0.8Y;$

$0.2Y=310;$

$Y=1550;$

b)

$G=125;$

$Y=10+0.8Y+200+125; Y=335+0.8Y;$

$0.2Y=335;$

$Y=1675;$

c) $2000=10+0.8*2000+200+G;$

$2000=10+1600+200+G;$

$G=2000-10-1600-200; G=190$

Answer: G equally 190.