Answer to Question #208258 in Macroeconomics for Mweemba

Question

C = 3000

I = 2000

G = 2500

T = 0.2Y

MPC = 0.5

X=6500

Z=5500 + 0.2Y

                   i.           Find the equilibrium level of income.

                 ii.           If investment expenditure decreases by 100, what will be the change in Y?

               iii.           Using the initial values, if G increases by 300 what will be the new level of Y?

               iv.           Using initial values, what will the new level of Y be if the tax rate rises to T=0.3Y?

Answer 1

Part i

$y=3000+0.5(4-0.24)+2000+2500+6500-5500-0.2y$

$y=8500+0.4y-0.2y$

$0.8y=8500$

$y=10625$

Part ii

If it falls by 100

$0.8y=8500-100$

$0.8y=8400$

$y=1050$

Part iii

If it increases by 300

$0.8y=8500+300$

$0.8y=8800$

$y=1100$

Part iv

$T=0.3y$

$y=8500+0.15y$

$0.85y=8500$

$y=1000$

Therefore, G= 2500 and T = 2125

Budget deficit = G-T = 375