Question

1- The fallowing data is about an economy’s basic macroeconomics. (C is consumption, Y is real national income, I is investment, Md is money demand, Ms is money supply, r is interest rate, G is government spending). C = 0,8Y + 100 I = 400-1000r Md = 15000-10000r G = 100 usd Net Export = 200 usd Ms = 12500 usd   

1. Find the equilibrium level of national income?
2. What will happen to the equilibrium point when Money supply decreases to 12.000 usd?
3. Find the multiplier?

Answer 1

Given that:

C = 0.8Y + 100

I = 400 - 1000r

Md = 15000 - 10000r

G = $100

Net Export = $200

Ms = $12500

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Find the equilibrium level of national income?

Y = C + I + G + NX

Y = 0.8Y + 100 + 400 - 1000r + 100 + 200

Y = 0.8Y + 800 - 1000r --- (1)

Now, first to find r, equate Md = Ms

15000 - 10000r = 12500

2500 = 10000r

r = 0.25 --- (2)

Substitute this value in (1)

Y = 0.8Y + 800 - 1000r

Y = 0.8Y + 800 - 250

0.2Y = 550

Y = $2750

This is the equilibrium level of national income

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What will happen to the equilibrium point when Money supply decreases to $12,000?

Now, to find the change in r, equate Md = Ms

15000 - 10000r = 12000

3000 = 10000r

r = 0.30 --- (3)

Substitute this value in (1)

Y = 0.8Y + 800 -1000r

Y = 0.8Y + 800 - 300

0.2Y = 500

Y = $2500

Thus, due to the decrease in MS, r rises, and national income falls.

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Find the multiplier?

The multiplier can be derived from the consumption function.

C = 0.8Y + 100

Here, MPC = 0.8

Multiplier =

Thus, Multiplier = 5