Chapter 9, Problem 1TY

To determine

To calculate: The increase in equilibrium GDP and also graphical representation.

Answer to Problem 1TY

  

The equilibrium level of GDP increases to $200 .

Explanation of Solution

According to the data given, the graph can be drawn as follows:

  

In this figure, GDP is measured on the horizontal axis while the consumption expenditure is on vertical axis. At point E₁ the 45 degree line intersects with the plotted line of GDP and consumption expenditure combination, where both GDP and domestic expenditure are at $3,800. Therefore the equilibrium GDP is $3,800.

The consumption expenditure has changed as the investment increased to $260. Therefore it can be written as

GDP	Consumption	Investment	Government purchases	Net export	Consumption Expenditure
3,600	3,220	260	120	40	3,640
3,700	3,310	260	120	40	3,730
3,800	3,400	260	120	40	3,820
3,900	3,490	260	120	40	3,910
4,000	3,580	260	120	40	4000

The equilibrium level of GDP and consumption expenditure is changed because the investment level is increased. So the new equilibrium level of GDP and consumption expenditure can be plotted as follows:

  

The GDP is measured on horizontal axis and on vertical axis the consumer expenditure is measured.

There is a shift of consumption expenditure from (C + I + G +NE) to (C + I + G + NE₁) due to the increase in investment. Point E2 is the current equilibrium point where the consumption cost is equal to the amount of GDP and the 45 degree line intersects. The amount of GDP equilibrium rises to $200 due to the investment rise of $20.

Economics Concept Introduction

Introduction:

GDP represents the Gross Domestic Product. It can be defined as the market value of all the finished goods produced in a given period in a country. GDP may be measured periodically, but is usually performed annually. Nominal GDP, Real GDP, growth rate of GDP and per capita GDP are various forms of GDP measurements.