Question2 Solve the following macroeconomic model wherein Y

Question-2: Solve the following macroeconomic model wherein;

Y = C + I + G + NX is the equilibrium condition in macroeconomic model

C = 1500 + 0.75Y consumption function ( C = C0+cYd), where c is MPC

I = 1250 planned investment function

G =1250 government purchases function

NX = - 250 net export function

a. Find the value of Real GDP (Y) by solving above macroeconomic model? b. If the value of Marginal Propensity to Consume (MPC) increases from c =0.75 to c = 0.80, then how it will affect the Real GDP (Y) in the economy?

Solution

For Calculating Real GDP we will use Expenditure Method. GDP is the sum total of -Private consumption expenditure+ Government consumption expenditure+ Gross capital formation and net export.

for fiding private consumption from this model ($1500X.75+= $1050)

GDP= Private Consumption expenditure+ Government Consumption expenditure+ Gross Capita Formation+ Net export

GDP= $1050+$1250+$1250 +$250=$3800

B)If the value of propensity to consume (MPC) increases from 0.75 to 0.8 then total private consumption will increase from $1050 to $1200. so GDP will also increase

GDP= $1200+ $1250+ $1250+$250= $3950