Consider the following model of an economy with no international trade, and in which the price level is fixed: C = 40 + (8/9)∙DI I = 30 G = 30 Taxes = (1/8)∙GDP where C is consumption demand, DI is disposable income, I is planned investment, G is government purchases, and all whole numbers are in billions of dollars. Determine the equilibrium level of production (GDP) in this economy (show your work), and draw this equilibrium situation on a graph. Use the multiplier to determine the change in equilibrium GDP that would result from an exogenous 16 billion dollar increase of government purchases. Then determine and explain the effects of this change on consumption, saving, and the government deficit.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter8: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 14QP

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Consider the following model of an economy with no international trade, and in which the price level is fixed:

C = 40 + (8/9)∙DI

I = 30

G = 30

Taxes = (1/8)∙GDP

where C is consumption demand, DI is disposable income, I is planned investment, G is government purchases, and all whole numbers are in billions of dollars.

Determine the equilibrium level of production (GDP) in this economy (show your work), and draw this equilibrium situation on a graph.

Use the multiplier to determine the change in equilibrium GDP that would result from an exogenous 16 billion dollar increase of government purchases. Then determine and explain the effects of this change on consumption, saving, and the government deficit.

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