Given the above model for an economy C = 100 + 0.8Yd G = 800 T = 500 I = 200 a)Calculate the level of savings when the economy is in b)Find government spending multiplier. c) Find the new equilibrium level of output if investment is increased by 100 (ΔI = 100).
Given the above model for an economy C = 100 + 0.8Yd G = 800 T = 500 I = 200 a)Calculate the level of savings when the economy is in b)Find government spending multiplier. c) Find the new equilibrium level of output if investment is increased by 100 (ΔI = 100).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Given the above model for an economy C = 100 + 0.8Yd
G = 800
T = 500
I = 200
a)Calculate the level of savings when the economy is in
b)Find government spending multiplier.
c) Find the new equilibrium level of output if investment is increased by 100 (ΔI = 100).
Expert Solution
Step 1
Calculation of level of savings when economy is in equilibrium:
Savings = Y – C
Income = C + I + G
Yd = Y -T
Y = 100 +0.8Yd + 200 + 800
Y = 100 + 0.8 (Y-500) + 1000
Y = 1100 + 0.8Y – 400
0.2Y = 700
Y = 3500.
Value of C = 100 + 0.8Yd.
C = 100 + 0.8 (3500 - 500)
C = 2500
Savings = 3500 – 2500 = 1000
Step 2
B. Calculation of government spending multiplier:
Spending multiplier = 5
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