Question

Suppose that the government of Ansonia is experiencing a large budget surplus with fixed government expenditures of G​ =200 and fixed taxes of T​ =150. Both G and T are independent of income. Assume that consumers of Ansonia behave as described in the following consumption function.C​ =300​+0.80(Y−​T)Suppose further that investment spending is fixed at I​ = 200Calculate the equilibrium level of GDP in Ansonia. Solve for equilibrium levels of Y, C, and S

Answer 1

To find the equilibrium level of GDP in Ansonia, we can use either the plug-in method or the multiplier method. The equations for aggregate expenditure and the consumption function allow us to solve for the equilibrium.

Step-by-step explanation:

To find the equilibrium level of GDP in Ansonia, we need to find the value of Y for which aggregate expenditure (AE) equals GDP.

In this case, AE = C + I + G + X - M. Given the consumption function C = 300 + 0.80(Y - T), investment spending I = 200, government expenditures G = 200, exports X = 500, imports M = 0.1(Y - T), and fixed taxes T = 150, we can substitute these values into the equation to get AE = 300 + 0.80(Y - 0.25Y) + 200 + 200 + 500 - 0.1(Y - 0.25Y). Simplifying this equation will give us the equilibrium level of GDP.

First, for the plug-in method, we substitute Y = 3500 into the equation and solve for G.

Second, for the multiplier method, we need to find the multiplier and use it to calculate the change in government spending needed to achieve a GDP of 3500.