Question

In a closed​ economy, consumers spend ​$100 regardless of the level of​ income, and the marginal propensity to consume​ (mpc) is 0.80. investment is equal to ​$250. the government spends ​$500 and collects ​$50 in taxes. the equilibrium level of gdp in this economy is ​$enter your response here ​(enter your response rounded to the nearest dollar​).

Options:
a. $2,000
b. $1,600
c. $1,800
d. $2,200

Answer 1

The equilibrium level of GDP in this closed economy, using the Keynesian consumption function and accounting for government spending, investment, and taxation, is determined to be $1,800.

Step-by-step explanation:

To determine the equilibrium level of GDP in a closed economy using the given data, we use the formula for aggregate demand (AD) which is the sum of consumer spending, investment, and government spending adjusted for taxes. The AD can be given by the formula C + I + G + (T - T), where:

• C is consumer spending,
• I is investment spending,
• G is government spending, and
• T - T represents net taxes (taxes collected minus transfer payments).

Given that consumers spend a flat amount of $100 regardless of income and have a marginal propensity to consume (MPC) of 0.80, the consumption function can be written as C = $100 + 0.80(Y - T), where Y is the national income, and T is the taxation.

In this scenario, investment (I) is $250, government spending (G) is $500, and tax revenue (T) is $50. Since it's a closed economy, we don't consider exports and imports in our calculation. To find the equilibrium level of GDP, set aggregate demand equal to national income (Y):
Y = C + I + G which simplifies to Y = $100 + 0.80(Y - $50) + $250 + $500.

Solving the equation by isolating Y gives us Y = $1,800. Therefore, the equilibrium level of GDP in this economy is $1,800.