Question

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:

G=T

a) $AD=Y$

$Y=50+0.8(Y−T)+200+100$

$Y=1350$

b) $0.2Y=275$

$Y=1375$

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

$G=-1,050$