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Intermediate Macro Equilibrium Solutions

1. For an economy characterized by a consumption function of C = 160 + 0.60YD, with investment I = 150 and government spending G = 150, the equilibrium output is Y = 1000, disposable income is YD = 900, and consumption is C = 700. 2. If government spending decreases to G = 110: (a) the new equilibrium output is Y = 900, which equals the new total demand, (b) private saving plus public saving still equals investment at the new equilibrium, confirming the national saving identity.

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14 views2 pages

Intermediate Macro Equilibrium Solutions

1. For an economy characterized by a consumption function of C = 160 + 0.60YD, with investment I = 150 and government spending G = 150, the equilibrium output is Y = 1000, disposable income is YD = 900, and consumption is C = 700. 2. If government spending decreases to G = 110: (a) the new equilibrium output is Y = 900, which equals the new total demand, (b) private saving plus public saving still equals investment at the new equilibrium, confirming the national saving identity.

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Intermediate Macro

blue #1

Tutorial 1: week starting August 3rd


Solutions

Solutions to blue problems


1. Suppose that the economy is characterized by the following:
C = 160 + 0.60YD ,

(consumption function)

I = 150
G = 150
T = 100

Solve for equilibrium Y , equilibrium disposable income YD , and equilibrium consumption C.


Solution: The national income accounting identity is
Y =C +I +G
so
Y = 160 + 0.60YD + 150 + 150
and since disposable income is YD = Y T and T = 100, the key equilibrium condition can be
written
Y = 160 + 0.60(Y 100) + 150 + 150
Solving for Y we get
Y = 1000
Therefore disposable income is YD = 1000 100 = 900, and consumption is C = 160 + 0.60
900 = 700.
2. For the same economy in question 1:
(a) Solve for equilibrium output. Calculate total demand. Does total demand equal production? Explain.
(b) Assume that government expenditure G is now equal to 110. Solve for equilibrium output.
Calculate total demand. Is demand higher or lower than in question 1? Does total demand
still equal production? Explain.
(c) With G still equal to 110, calculate private plus public saving. Is this sum equal to
investment? Explain.

Intermediate macro: blue #1

Solution:
(a) From question 1, equilibrium GDP = equilibrium output = 1000. Total demand = C +
I + G = 700 + 150 + 150 = 1000. At equilibrium, total demand = production.
(b) If G is reduced from 150 to 110 (i.e., a contractionary fiscal policy), the total demand curve
ZZ shifts down and we have:
Y = 160 + 0.60(Y 100) + 150 + 110
and so solving for Y we get
Y = 900
At the equilibrium, new total demand = 900 = new production.
(c) Private saving is defined as YD C = (Y T )C = (900100)(160+0.60800) = 160.
Public saving is defined as T G = 100 110 = 10.
National saving = private + public saving = 160 + (10) = 150 = I. This confirms the
identity that national saving equals investment at the equilibrium.

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