Question

Refer to the information in the table that follows to answer the question that follows:

The Agrinimia Macroeconomy

Output (Income) Y	Net Taxes T	Consumption Spending (C = 100 + 0.9Yd)	Savings S	Planned Investment I	Government Spending G
2400	100	2170	130	130	200
2800	100	2530	170	130	200
3000	100	2710	190	130	200
3200	100	2890	210	130	200
3400	100	3070	230	130	200
3600	100	3250	250	130	200
3800	100	3430	270	130	200

The economy is at the equilibrium level of output. If government spending increases by 250 (from 200 to 450), then calculate the new equilibrium level of output?

Select one:

a. 5400

b. 450

c. 3650

d. 5900

Answer 1

Answer: d

The equilibrium equation is as below:

Y = C + I + G

At Y = 3,400, the right side is (C + I + G = 3070 + 130 + 200 =) 3,400. Therefore, the equilibrium output is 3,400.

Multiplier = 1 / (1 – 0.9); 0.9 from C function

                 = 1 / 0.1

                 = 10

If G increases by 250, Y would increase as below:

Increase in Y = G × Multiplier

                        = 250 × 10

                        = 2,500

This is to be added to the earlier equilibrium output in order to get the new output.

New output = 3,400 + 2,500

                   = 5,900