Answer to Question #311268 in Macroeconomics for dodo

Question

2.1 Consider a closed economy that is described by the following model:

C = 280m + 0.72Y

Where:

C = Consumption Y = Income

I = 150m I = Investment

G = 300m G = Government spending

T = 22% t = Tax rate

2.1.1 Calculate the multiplier. (3)

2.1.2 Calculate the total autonomous spending. (2)

2.1.3 Calculate the equilibrium income. (3)

2.1.4 Calculate the level of savings at equilibrium. (2)

2.1.5 Calculate the amount of tax collected at equilibrium. (3)

2.2 Use the Keynesian diagram to explain and illustrate the effect of an increase in investment on employment and output in the economy. (7)

Answer 1

Consider a closed economy that is described by the following

model:

C = 280m + 0.72Y

Where:

C = Consumption Y = Income

I = 150m I = Investment

G = 300m G = Government spending

T = 22% t = Tax rate

2.1.1 Calculate the multiplier. (3)

Solution

$\alpha$ = 1/(1-C)

C(CMPC)=$\Delta$ C/$\Delta$ Y =0.27= C

$\alpha$ = 1/(1-0.72)

=3.5714

2.1.2 Calculate the total autonomous spending. (2)

Solution

$\Alpha\omicron$ = C + I + G

= 280m + 150m +300m

= 730m

2.1.3 Calculate the equilibrium income. (3)

Solution

Y = C + I + G

Y = 280 + 0.72Y +150 + 300

Y - 0.72Y = 730

0.28Y = 730

0.28Y/0.28 = 730/0.28

Y= 2607.14M

Therefore equilibrium income is 2607.14M

2.1.4 Calculate the level of savings at equilibrium. (2)

Solution

C = 280 + 0.72Y

= 280 + 0.72(2607.14)

= 2157.15M

Y = C + S

2607.14 =2157.14 + S

S = 2607.14 - 2157.14

=450M

2.1.5 Calculate the amount of tax collected at equilibrium. (3)

Solution

tax rate is 22 % = 0.22

t(Y) = 0.22(2607.14)

= 573.5708M

2.2 Use the Keynesian diagram to explain and illustrate the effect of

an increase in investment on employment and output in the economy. (7)

Solution

An increase in investment shift the aggregate demand positively resulting to an increase or rise in employment.

Since employment results from efficiency of aggregate demand, employment and income can thus be increasing the aggregate demand and this is achieved by increasing the levels of investment.

once investment increases, employment and income increase. Increased income leads to increase in demand for consumption goods which leads to further increase in employment and income.

In multiplier process, income increases many times upon increase in investment. When investment expenditure increases, then the aggregate demand curve deflects upwards and equilibrium changes and attains equilibrium at high income.