Question

In: Economics

Assume a simple Keynesian model (no government, and no foreign trade) with the following data: C...

Assume a simple Keynesian model (no government, and no foreign trade)
with the following data:
C = 100 + .8Yd
I = $150
Calculate the equilibrium levels of aggregate income, aggregate
consumption, aggregate savings, and aggregate spending.
2.
Assuming that aggregate income at full employment is Y
f= $1,600;
calculate the full employment levels of aggregate consumption, aggregate
savings, and aggregate spending.

Solutions

Expert Solution

(a)

Equilibrium in the economy occurs when Y = AE where AE= aggregate expenditure = C + I(when economy is closed(i.e. no foreign trade) and there is no government). As there is no government thus Taxes(T) = 0 and hence, Yd = Disposable income = Y - T = Y)

So Y = AE = C + I => Y = C = 100 + .8Yd + 150 => Y = 100 + .8Y + 150

=> 0.2Y = 250 => Y = 1250 ------------------Equilibrium income

C = 100 + .8Yd = 100 + .8*1250 = 1100

=> C = 1100 ---------------Equilibrium level of consumption

=> S(saving) = Y - C(when economy is closed(i.e. no foreign trade) = 1250 - 1100 = 150

=> S = 150 -------------Equilibrium level of Saving

=> AE = C + I = 1100 + 150 = 1250

=> AE = 1250 ----------Aggregate expenditure

(b)

Equilibrium in the economy occurs when Y = AE where AE= aggregate expenditure = C + I(when economy is closed(i.e. no foreign trade) and there is no government). As there is no government thus Taxes(T) = 0 and hence, Yd = Disposable income = Y - T = Y)

Now Yf = full employment level of aggregate income = 1600 => Y = Yf = 1600

Thus, C = 100 + .8Yf = 0.8*1600+100 = 1380

=> S = Y - C = 1600 - 1380 = 220-------------Aggregate saving

=> Aggregate Expenditure = C + I = 1380 + 150 = 1530 ----------Aggregate spending


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