Answer to Question #249232 in Macroeconomics for Biba

Question

4. In the simple multiplier model, assume that investment is always zero. Show that equilibrium output in this special case would come at the break-even point of the consumption function. Why would equilibrium output come above the break-even point when investment is positive?

Answer 1

I)

In the simple multiplier model, consumption function shows the relationship between level of consumption expenditures and level of disposable personal income. Break even point is the level at which house holds break even, that is, level at which consumption expenditure equals suit opinions.

Along the 45 degrees line that is used to locate the break even point, consumption is equal to GDP, which is the equilibrium output and comes at the break even point of the consumption function.

II)

When investment is positive, the equilibrium output comes above the break even point because it includes investment in addition to total expenditure on consumption.