Question

Suppose that for a particular economy and period, investment was equal to 200, government expenditure was equal to 100, net taxes were fixed at 150, and consumption (C) was given by the consumption function C = 20 + 0.6YD where YD is disposable income and Y is GDP. a. What is the level of equilibrium income (Y) ? b. What is the value of the government expenditure multiplier (Y>G) ? Of the tax multiplier (Y>T)? c. Suppose the investment declined by 100 units to a level of 100. What will be the new level of equilibrium income?

Answer 1

a. Y = C + I + G + (X – M)= 20 + 0.6(Y-150)+200+100 = 20+0.6Y-90+200+100

Y-0.6Y= 230

Y= $\frac{230}{0.4}$ = 575

b. government expenditure multiplier= $\frac{575}{100}$ = 5.75

 tax multiplier =$\frac{575}{150}$ = 3.833

c. Y= $\frac{130}{0.4}$ = 325