1. (15 points)
Assume the following open economy for Questions 1a, 1b, 1c and 1d below:
C = 300 + 0.80(Y – 125)
I = 150
G = 250
X =115
M = 125+.05Y
1a). Determine (solve for) the equilibrium level of income or GDP (Y).
Y=C+I+G+X-M
Y= 300+150+250+115 -125 -.05Y +.8Y -100
.25Y = 590
Y= 2360
1b). Determine the impact on income of a 50 increase in government spending
from 250 to 300.
Y= 300+150+300+115 -125 -.05Y +.8Y -100
.25Y = 640
Y= 2560
1c). Using the original data, compute the impact of a 50 decrease in taxes from
125 to 75.
Y= 300+150+250+115 -125 -.05Y +.8Y -60
.25Y = 630
Y= 2520
1d). If the government seeks to raise income to 3,000, how much should it raise
government spending?
current income=2360
required income=3000
change = 670
multiplier value = 1/1-MPC +MPIm= 1/(1-.8 +0.05)= 1/ .25=4 so we need G to rise by 670/4 = 167.5 l