Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 25, Problem 5TY
To determine
Calculate the equilibrium level of
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Suppose the economy of Apple Republic is represented by the following equations:
Z = C +|+ G
C = 500 + .5YD
T= 600
|= 300
YD = Y - T
G = 2000
(Enter number only into the boxes)
a. Given the above variables, calculate the equilibrium level of output (Y)
disposable income (Yp)
and consumption (C)
Hint: First specify (using the above numbers) the demand equation (Z) for this economy. Second, using the equilibrium condition, equate this expression with Y. Once
you have done this, solve for the equilibrium level of output (Y). Third, once you get Y, you can T from Y to get Yp. Finally, once you get Yp, you substitute it into the
consumption equation to get consumption (C).
b. Now, assume that government spending decreases from 2000 to 1900. What is the new equilibrium level of output (Y)
? What is the multiplier
for this economy
c. Now, assume that G is still at 2000, but taxes increase from 600 to 700. What is the new equilibrium level of output (Y)
? What is the multiplier
for this…
Q1: There are two equations for macroeconomic equilibrium in an economy. State them.
Show (mathematically) that Savings equals Investment when expenditure equals income.
What type of economy would you have when exports equal imports? What happens to the
savings-investment relationship if exports are not equal to imports? [This can be greater
than or less than]. [Hint: See video lecture on Open Economy Macroeconomics]. Note: Ensure
to write out full meanings when you use abbreviations or short forms. This is key to getting
full marks.
Assume the following model of the expenditure sector:
S=C+I+G+Nx
TR=100
C=420+(4/5)YD
I=160
G=180
Nx=-40
YD=Y+TR-TA
TA=(1/6)Y
If the government would like to increase the equilibrium level of output (Y) to the full employment level Y*=2,700, by how much should government purchases (G) be changed?
Chapter 25 Solutions
Economics: Principles & Policy
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