Final answer:
The equilibrium level of an economy is found by setting aggregate expenditure equal to output. For any given level of potential GDP, the necessary change in government spending can be determined by either direct calculation or using the expenditure multiplier. Equilibrium in financial markets is where supply meets demand, and any shift in these curves results in changes to the equilibrium interest rate and quantity.
Step-by-step explanation:
To find the equilibrium in an economy with the given consumption function, taxation rate, government spending, investment, exports, and imports, we need to set Aggregate Expenditure (AE) equal to Output (Y). AE is defined as C + I + G + X - M. Substituting the given functions and solving for Y gives us the equilibrium level of output.
- Aggregate Expenditure (AE) equation: AE = C + I + G + X - M.
- Taxes (T): T = 0.25Y.
- Consumption (C): C = 400 + 0.85(Y - T).
- Investment (I): I = 300.
- Government Spending (G): G = 200.
- Exports (X): X = 500.
- Imports (M): M = 0.10(Y - T).
Solving for Y, we get:
Y = 400 + 0.85(Y - 0.25Y) + 300 + 200 + 500 - 0.1(Y - 0.25Y)
By simplifying the equation and solving for Y, we arrive at the equilibrium level of output for the economy.
To determine the change in government spending needed to reach a potential GDP of 3,500, we first plug Y = 3,500 into the above equations and solve for G. Secondly, we calculate the multiplier to achieve the same.
The equilibrium interest rate and quantities in financial markets like those for credit card borrowing or home loans are determined where the quantity demanded equals the quantity supplied. If there is a change in the supply or demand, such as a decrease in funds supplied, the equilibrium interest rate will adjust to balance the new level of supply and demand.