Question

The following equations describe consumption, investment, government spending, taxes, and net exports in the country of Economika.

C = 400 + 0.80(Y - T)
I = 500
G = 450
T = 450
X = 100
1. In Economika, equilibrium GDP is equal to $_. (Round your answer to the nearest dollar.)
2. If real GDP in Economika is currently $4,450, which of the following is true?
a) There will be an unplanned decrease in inventories, and real GDP will increase next period.
b) There will be an unplanned increase in inventories, and real GDP will increase next period.
c) There will be an unplanned decrease in inventories, and real GDP will decrease next period.
d) There will be an unplanned increase in inventories, and real GDP will decrease next period.
e) There will be no unplanned change in inventories, and real GDP will stay the same next period.

Answer 1

1. $5,450

2. a) There will be an unplanned decrease in inventories, and real GDP will increase next period.

Step-by-step explanation:

1. GDP (Y) is the total economic output and can be calculated using the Expenditure method which is;

Y = C + I + G + X

Y = (400 + 0.80(Y - 450)) + 500 + 450 + 100

Y = 400 + 0.80Y - 360 + 500 + 450 + 100

Y - 0.80Y = 1,090

0.2Y = 1,090

Y = $5,450

2. With Equilibrium GDP being higher than the Real GDP of the country, the excess Demand (GDP is aggregate demand) will lead to more consumption in the Economy which will lead to an unplanned decrease inventories. This will then spur companies to produce more to meet the higher demand causing Real GDP to go up.