QuestionJuly 15, 2025

Suppose that the economy is depicted by the following relationship: where: C= 100+0.90(Y-T) Expenditures=C+I+G+X G= 700 T= 700 I= 100 X= 50 The economy is in equilibrium at a level of real GDP or income of square Now suppose that the government decided to increase government spending by 100 and taxes by 100 What is the new equilibrium level of GDP or income? square

Suppose that the economy is depicted by the following relationship: where: C= 100+0.90(Y-T) Expenditures=C+I+G+X G= 700 T= 700 I= 100 X= 50 The economy is in equilibrium at a level of real GDP or income of square Now suppose that the government decided to increase government spending by 100 and taxes by 100 What is the new equilibrium level of GDP or income? square
Suppose that the economy is depicted by the following relationship:
where: C= 100+0.90(Y-T)
Expenditures=C+I+G+X
G= 700
T= 700
I= 100
X= 50
The economy is in equilibrium at a level of real GDP or income of square 
Now suppose that the government decided to increase government spending by 100 and taxes by 100
What is the new equilibrium level of GDP or income? square

Solution
4.2(240 votes)

Answer

\3300 Explanation 1. Define Initial Consumption Function C = 100 + 0.90(Y - T), where T = 700. 2. Calculate Initial Equilibrium GDP Set Expenditures = Y. So, Y = C + I + G + X. Substitute: C = 100 + 0.90(Y - 700), I = 100, G = 700, X = 50. Solve: Y = (100 + 0.90(Y - 700)) + 100 + 700 + 50. Simplify: Y = 950 + 0.90Y - 630. Rearrange: Y - 0.90Y = 320. Solve: 0.10Y = 320 \Rightarrow Y = 3200. 3. Adjust for Increased Government Spending and Taxes New G = 800, new T = 800. New C = 100 + 0.90(Y - 800). New Expenditure Equation: Y = (100 + 0.90(Y - 800)) + 100 + 800 + 50. Simplify: Y = 1050 + 0.90Y - 720. Rearrange: Y - 0.90Y = 330. Solve: 0.10Y = 330 \Rightarrow Y = 3300.

Explanation

1. Define Initial Consumption Function<br /> $C = 100 + 0.90(Y - T)$, where $T = 700$.<br /><br />2. Calculate Initial Equilibrium GDP<br /> Set $Expenditures = Y$. So, $Y = C + I + G + X$.<br /> Substitute: $C = 100 + 0.90(Y - 700)$, $I = 100$, $G = 700$, $X = 50$.<br /> Solve: $Y = (100 + 0.90(Y - 700)) + 100 + 700 + 50$.<br /> Simplify: $Y = 950 + 0.90Y - 630$.<br /> Rearrange: $Y - 0.90Y = 320$.<br /> Solve: $0.10Y = 320 \Rightarrow Y = 3200$.<br /><br />3. Adjust for Increased Government Spending and Taxes<br /> New $G = 800$, new $T = 800$.<br /> New $C = 100 + 0.90(Y - 800)$.<br /> New Expenditure Equation: $Y = (100 + 0.90(Y - 800)) + 100 + 800 + 50$.<br /> Simplify: $Y = 1050 + 0.90Y - 720$.<br /> Rearrange: $Y - 0.90Y = 330$.<br /> Solve: $0.10Y = 330 \Rightarrow Y = 3300$.
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