Q1 Suppose the United States economy is represented by the f

Q#1. Suppose the United States economy is represented by the following equations: C-500+0.5YD T-600 - G 2000 I 300 YD-Y-T a. Given the above variables, calculate the equilibrium level of output. (5 points) b. Now, assume that taxes increase from 600 to 700. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy? (5 points)

Solution

a)

Y = C+I+G

Y = 500 + 0.5( Y - 600) + 300 + 2,000

Y = 500 + 0.5Y - 300 + 300 + 2,000

Y - 0.5Y = 2500

Y(1-0.5) = 2500

Y = 2500/ 0.5

= 5,000

Equilibrium level of output is 5,000

b)

Taxes increase from 600 to 700

Y = 500 + 0.5(Y - 700) + 300 + 2,000

= 500 + 0.5Y - 350 + 300 + 2,000

Y(1-0.5) =2450

Y = 2450/ 0.5

= 4900

Income decreases by 100

Multiplier Value = 1/1-MPC

= 1/1-0.5

= 1/0.5

= 2