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Suppose the economy is in equilibrium, and assume no government or foreign sector. If total saving...

Suppose the economy is in equilibrium, and assume no government or foreign sector. If total saving equals 72420, then intended investment must equal...

Question 6 options:

Suppose a closed economy with no government spending or taxing is capable of producing an output of $3,000 at full employment. Suppose also that autonomous consumption is $400, intended investment is $200, and on average households will save 25 cents of every additional dollar of income they receive. Calculate the following (express your answers as whole numbers without decimals, commas, dollar signs, or anything else).

Multiplier:

Value of output (Y) in equilibrium:

Total consumption in equilibrium

Solutions

Expert Solution

(1)

Intended investment = Total saving = 72,420

(2)

MPS = 0.25, so MPC = 1 - MPS = 1 - 0.25 = 0.75

(a)

Multiplier = 1 / MPS = 1/0.25 = 4

(b)

In equilibrium, Y = C + I

Y = 400 + 0.75Y + 200

0.25Y = 600

Y = 2,400

(c)

C = 400 + 0.75 x 2,400 = 400 + 1,800 = 2,200

Rahul Sunny answered 2 years ago
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