Assume the following open economy for Questions 1a, 1b, 1c and 1d below:
C = 200 + 0.75(Y – 100)
I = 130
G = 200
X =95
M = 115

A) Determine (solve for) the equilibrium level of income or GDP (Y). 

Y=C+I+G+NX

200+.75( Y -100) +130+200+95-115 = Y

.25Y = 435

Y= 1740
B) Determine the impact on income of a 50 increase in government spending from 200 to 250. 

Y=C+I+G+NX

200+.75( Y -100) +130+250+95-115 = Y

.25Y = 485

Y= 1940

C) If the government seeks to increase income by 40, how much should it raise government spending?

The multiplier= 1/(1-MPC) = 1/(1-.75) = 4

Change in GDP / change in G = 4

So required change in G = 40/4 =10

G must rise by 10 

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