In: Economics
In a hypothetical economy, the aggregate consumption expenditure
is given by C = 20 + 0.6Yd , where Yd is the real disposable
income. In the current quarter, the net tax is T = 60, and the
investment expenditure is I = 30. Government budget is balanced,
meaning that the government expenditure is G = 60. Finally, net
exports is N X = 0. All these variables are real values. We hold
the price level fixed.
Assume that, given a price level, firms supply as much as the
aggregate expenditure in the very short run. That is, Y = AE. The
equilibrium real GDP given a price level is_____. A. 118 B. 180 C.
185 D. undetermined
AE = C + I + G + NX
AE = 20 + 0.6Yd + 30 + 60 + 0
AE = 110 + 0.6 (Y - T)
AE = 110 + 0.6(Y - 60)
AE = 110 + 0.6Y - 36
AE = 74 + 0.6Y
Note: Yd = Y - T
At equilibrium Y = AE
Y = 74 + 0.6Y
Y - 0.6Y = 74
0.4Y = 74
Y = 74 / 0.4
Y = 185.
The equilibrium real GDP is185.
Answer: Option (C).