Chapter 10 Exercise 2 d

# Chapter 10 Exercise 2 d - along the 45-degree line(the...

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Chapter 10, Exercise #2 d. (6 th Edition) Given the following model, solve for the equilibrium level of income. Y= C + I + G C = 125 + 0.75 (Y – T) I = 100 G = 150 T = 100 Based on the same information in exercise #1, we were able to determine the equilibrium level of income for this model. The result was Y = 1200. This problem is slightly different, in that government spending (G) increases from 150 to 151. This is the only difference between the models. As noted in the study guide, “it is tempting to say that an increase in \$1 billion in government spending will lead to an increase of \$1 billion in equilibrium income.” However, this is not true because of the multiplier effect. This means that an increase in G of \$1 billion, all other things equal, will cause the equilibrium income to increase by more than \$ 1 billion. Below is the initial equilibrium solution, as well as the solution the scenario where G is increased by \$1 billion. According to the Keynesian model, we know that equilibrium occurs somewhere

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Unformatted text preview: along the 45-degree line (the slope of this line is 1). This is where Planned Expenditures (E) are equal to Actual Expenditures (Y). In addition to the mode given above, we also know that E = Y in equilibrium. E = C + I + G E = [ 125 + 0.75 (Y – T) ] + [ 150 ] + [ 100 ] E = 125 + 0.75 (Y – 100) + 150 + 100 E = 375 + 0.75 Y – 0.75 (100) E = 300 + 0.75 Y Since E = Y in equilibrium, then Y = 300 + 0.75 Y Y – 0.75 Y = 300 0.25 Y = 300 Y = [1 / 0.25] 300 Y = 1200 (this is the equilibrium income when G = 150) E = C + I + G E = [ 125 + 0.75 (Y – T) ] + [ 151 ] + [ 100 ] (Please note that G is now 151, not 150 – this represents the increase in G of \$1 billion) E = 125 + 0.75 (Y – 100) + 151 + 100 E = 376 + 0.75 Y – 0.75 (100) E = 301 + 0.75 Y Since E = Y in equilibrium, then Y = 301 + 0.75 Y Y – 0.75 Y = 301 0.25 Y = 301 Y = [1 / 0.25] 301 Y = 1204 (this is the NEW equilibrium income when G = 151)...
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Chapter 10 Exercise 2 d - along the 45-degree line(the...

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