Individual Asgt 1

All workings must be shown in detail in your submission.

1. An economy has the following characteristics:
Y = National income
Taxes = T = 0.25Y
C = Consumption = 400 + 0.85(Y – T)
I = 300
G = 200
X = 500
M = 0.1(Y – T)
Find the equilibrium for this economy. If potential GDP is 3,500, then what change in
government spending is needed to achieve this level? Solve Do this problem two ways:
(i) plug 3,500 into the equations and solve for G.
(ii) calculate the multiplier and figure it out that way.

2. Fill in the Table representing these data. Assume that the tax rate is 0.4 of national income;
the MPC out of the after-tax income is 0.8; investment is $2,000; government spending is
$1,000; exports are $2,000 and imports are 0.05 of after-tax income. What is the equilibrium
level of output for this economy?

National After-tax Consumption I+G+X Minus Aggregate

Income Income Imports Expenditures

8,000 4,340

9,000

10,000

11,000

12,000

13,000