Question

In: Economics

Suppose in one economy, if people have no disposable income, they still spend 5 million dollars....

Suppose in one economy, if people have no disposable income, they still spend 5 million dollars. For every dollar they earn, these people save 0.2 dollars and spend 0.8 dollars. The investment level is 2 million dollars, and government spending is 1 million dollars. The government takes 1 million dollar tax. There is no import or export. What is the output in the goods market equilibrium for this economy? Show your computation

Expert Solution

the equilibrium is at

Y=C+I+G

C=consumption

Y=equilibrium output

I=investment

G=govenment spending

the consumption function is the form of

C=a+MPC*DI

DI -disposable income

a=autonomus consumption=the consumption when disposable income is zero =$5 million

MPC=1-MPS=1-0.2=0.8

C=5+0.8Y

DI=Y-T

Using all values

Y=5+0.8*(Y-1)+2+1

Y=8+0.8Y-0.8

0.2Y=7.2

Y=36

the output in the goods market equilibrium for this economy is $36 million

Rahul Sunny answered 2 years ago

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