Question

2) The President asks you to find the equilibrium level of output for the economy. Suppose you are given that government spending is $10000, investment is $7500, autonomous spending is $2000, the marginal propensity to consume is. 8, and, finally, the level of net exports is -$1000. Now, suppose exports grow by $1000 (Net exports are now $0. ), What would be the equilibrium level of output? What was the multiplier in this case?

Answer 1

The equilibrium level of output in the economy can be calculated using the following formula:

Y = C + I + G + NX

Where:

Y = Equilibrium level of output

C = Consumption

I = Investment

G = Government spending

NX = Net exports

We can calculate consumption using the marginal propensity to consume (MPC) and autonomous spending (A):

C = MPC(Y - T) + A

Where:

T = Taxes (assumed to be 0 in this case)

Substituting in the given values:

C = 0.8(Y - 0) + 2000

C = 0.8Y + 2000

Substituting in the given values for investment, government spending, and net exports:

Y = 0.8Y + 2000 + 7500 + 10000 - 1000

Y = 0.8Y + 19500

Solving for Y:

0.2Y = 19500

Y = 97500

Therefore, the equilibrium level of output in the economy is $97,500.

If net exports increase by $1000, then the new value of net exports (NX) is 0.

Substituting the new value of NX into the formula:

Y = 0.8Y + 2000 + 7500 + 10000 - 0

Y = 0.8Y + 19500

Solving for Y:

0.2Y = 19500

Y = 97500

Therefore, the equilibrium level of output in the economy is still $97,500.

The multiplier is calculated as:

Multiplier = 1 / (1 - MPC)

Substituting in the value of MPC:

Multiplier = 1 / (1 - 0.8)

Multiplier = 5

Therefore, the multiplier in this case is 5.