Question

2.    C = 50 + .8YD = 50 + .8(Y – T)

        I = 150

        G = 200

        T = 200

a)   Calculate ∆Y if ∆G = 100 (assuming that G could change all by itself).

b) Calculate ∆Y if ∆T = 100 (assuming that T could change all by itself).

c) Calculate ∆Y for ∆G = ∆T = 100. Show that you could have predicted this result from your answers to parts a and b.

Answer 1

C = 50 + .8YD = 50 + .8(Y – T)

        I = 150

        G = 200

        T = 200

Y = C+I+G

Y = 50 + .8( Y-200) + 150 +200

Y = 0.8Y – 160 +400

Y – 0.8Y = 240

Y (1-0.8) = 240

Y = 240/0.2

=1,200

a)   Calculate ∆Y if ∆G = 100 (assuming that G could change all by itself).

Y = 0.8Y – 160 + 400 +100

Y-0.8Y = 240 +100

Y = 340/0.2

=1,700

Change in Income = 1,700 – 1,200

=500

b) Calculate ∆Y if ∆T = 100 (assuming that T could change all by itself).

Y = 0.8Y – 0.8*300 +400

Y – 0.8Y = - 240 + 400

Y = 160 / 0.2

= 800

Change in income =1200 – 800

= 400

Income fall by 400

c) Calculate ∆Y for ∆G = ∆T = 100. Show that you could have predicted this result from your answers to parts a and b.

Y = 0.8Y -0.8*300 +400 +100

Y – (1-0.8) = - 240 + 500

Y = 260/0.2

= 1,300

Change in income = 1,300 – 1200

= 100

Difference between a and b; 500 – 400

=100