Rob Brumer

Professor Sarich
S347


1. The equilibrium level of Y and C is the point where the various functions no
longer vary in time. This will occur when Y = 0.

Y = 0.5*(E(t) Y(t)) = 0

This happens when E(t) = Y(t)

E(t) = C(t) + I + G = C(t) + 150 + 250 = C(t) + 400

C(t) = 200 + 0.8*Y(t)

E(t) = 200 + 0.8*Y(t) + 400 = 0.8*Y(t) + 600

Equilibrium is at
0.8*Y(t) + 600 = Y(t)

0.2*Y(t) = 600

Y(t) = 3000

C(t) = 200 + 0.8*3000 = 2600

C(t) = 2600

2. The multiplier in an economic system determines how much the endogenous
variables will change when an exogenous variable changes. For the purposes of this
analysis, we will assume that (I + G) can be treated as a single exogenous variable. If
we increase this by a factor of N, then the equilibrium shifts as follows:

E(t) = 0.8*Y(t) + N(I+G) = Y(t)

0.2*Y(t) = N(I+G)

Y(t) = 5*N(I+G)

Increasing the exogenous variable by N increased the endogenous variable by 5N.

Thus, the multiplier = 5



3.


It can be observed that as time increases, income approaches its equilibrium value
of 3,000 and consumption approaches its equilibrium value of 2,600.

4.



When we begin with an initial condition of Y(0) = 4,000, it can be seen that
equilibrium is still obtained. As time increases, income approaches 3,000 and
consumption approaches 2,600.

5. This equilibrium is the point where expenditure is exactly equal to income.
Consumption is not equal to income, because some of the expenditure is a result of
investment and government spending. This is the point where the difference
2000
2100
2200
2300
2400
2500
2600
2700
2800
2900
3000
0 10 20 30 40 50 60
I
n
c
o
m
e

a
n
d

C
o
n
s
u
m
p
t
i
o
n

Time (t)
Income and Consumption v. Time
Income (Y)
Consumption (C)
2600
2800
3000
3200
3400
3600
3800
4000
0 10 20 30 40 50 60
I
n
c
o
m
e

a
n
d

C
o
n
s
u
m
p
t
i
o
n

Time (t)
Income and Consumption v. Time
Income (Y)
Consumption (C)
between supply and demand has been reduced to zero as a result of firms changing
their output.

6. If we assume that the only policy change we can make is to change government
spending (and not investment), then we can solve for the value of G that will give us
equilibrium values of E and Y of 5,000. We will set x = I + G

E(t) = 0.8*Y(t) + x = 5,000

4,000 + x = 5,000

x = 1,000

I + G = 1,000 = 150 + G

G = 850

Thus, to obtain the full-employment level of output, government spending must be
increased from 250 to 850.