Question

Consider the following numerical example of the simple keynesian model with no government spending ,taxes or foreign sector (all figures in R millions):
C=100 + 0,9Y
I=50
Answer the following questions.
1-calculate the equilibrium level of output.
2-in equilibrium , what is the value of consumption spending ?use this number to verify that the sum of C and I in equilbrium equals the value for equilibrium output you obtained above.
3-suppose the level of output that creates full employment in the economy is 1800.using the multipler ,determine the level of investment spending that would create full employment in this economy.

Answer 1

1. In equilibrium Y = C + I = 100 + 0.9Y + 50,

0.1Y = 150,

Y = 1500.

2. In equilibrium the value of consumption spending is C = 100 + 0.9×1500 = 1450.

3. If the level of output that creates full employment in the economy is 1800, then we need increase in GDP of 300 to close the recessional gap. The multipler is 1/(1 - 0.9) = 10, so the level of investment spending that would create full employment in this economy is 300/10 = 30.