In a hypothetical economy, the aggregate consumption expenditure is given by C = 20 + 0.6Yd...

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

Solutions

Expert Solution

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).

Rahul Sunny answered 1 year ago

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