Question

Given Ca=20 c=MPC=3/4 Ia=I=20 detemine equilibrium level of income when there is no government sector b; define equilibrium level of income when government spending is 25 &no taxation

Answer 1

Qn. a

Equilibrium level of income without government sector is given as;

$Y=C+I$

$C=Ca+c\times Yd$

$c=\frac{3}{4}=0.75$ $Ia=I=20$

but $Yd=Y-T$

$C=20+0.75Yd$ but in this case there is no taxation so $Yd=Y$

$Y=(20+0.75Y)+20$

$Y=40+0.75Y$

$0.25Y=40$

$\bold{Y=160}$ equilibrium income without government.

Qn. b

Equilibrium income with government spending of 25 is given as;

$Y=C+I+G$

but we have $Y=C+I\to 160$ and the value of $G=25$

$Y=160+25\to 185$