MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 9, Problem 1TY
To determine
To calculate: The increase in equilibrium
Expert Solution & Answer
Answer to Problem 1TY
The equilibrium level of GDP increases to $200 .
Explanation of Solution
According to the data given, the graph can be drawn as follows:
In this figure, GDP is measured on the horizontal axis while the consumption expenditure is on vertical axis. At point E1 the 45 degree line intersects with the plotted line of GDP and consumption expenditure combination, where both GDP and domestic expenditure are at $3,800. Therefore the equilibrium GDP is $3,800.
The consumption expenditure has changed as the investment increased to $260. Therefore it can be written as
| GDP | Consumption | Investment | Government purchases | Net export | Consumption Expenditure |
| 3,600 | 3,220 | 260 | 120 | 40 | 3,640 |
| 3,700 | 3,310 | 260 | 120 | 40 | 3,730 |
| 3,800 | 3,400 | 260 | 120 | 40 | 3,820 |
| 3,900 | 3,490 | 260 | 120 | 40 | 3,910 |
| 4,000 | 3,580 | 260 | 120 | 40 | 4000 |
The equilibrium level of GDP and consumption expenditure is changed because the investment level is increased. So the new equilibrium level of GDP and consumption expenditure can be plotted as follows:
The GDP is measured on horizontal axis and on vertical axis the consumer expenditure is measured.
There is a shift of consumption expenditure from (C + I + G +NE) to (C + I + G + NE1) due to the increase in investment. Point E2 is the current equilibrium point where the consumption cost is equal to the amount of GDP and the 45 degree line intersects. The amount of GDP equilibrium rises to $200 due to the investment rise of $20.
Economics Concept Introduction
Introduction:
GDP represents the Gross Domestic Product. It can be defined as the market value of all the finished goods produced in a given period in a country. GDP may be measured periodically, but is usually performed annually. Nominal GDP, Real GDP, growth rate of GDP and per capita GDP are various forms of GDP measurements.
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Students have asked these similar questions
Assume the following model of the economy:
Y =C+I+G
C = 120 + 0.5 (Y-T)
I= 100 -10r
G = 50
T=40
Identify each of the variables and briefly explain their meaning.
Calculate the four components of aggregate expenditure and GDP for the following economy using data from the table below.Instructions: Enter your responses as whole numbers. If you are entering any negative numbers, be sure to include a negative (-) sign in front of those numbers.
GDP
Consumption expenditures
$600
Exports
$75
Government purchases of goods and services
$200
Construction of new homes and apartments
$100
Sales of existing homes and apartments
$200
Imports
$100
Beginning-of-year inventory stocks
$100
End-of-year inventory stocks
$150
Business fixed investment
$100
Government payments to retirees
$100
Household purchases of durable goods
$150
Consumption expenditures: $
Investment expenditures: $
Government Purchases: $ Net Exports: $ GDP: $
Potential
GDP|
' 45°
C+1+(X-IM)
4,800
B
3,200
3,000 4,000 5,000
2. Use the graph above to answer the following questions:
a. Calculate the MPC:
b. What is the equilibrium value of GDP?_
Real Expenditure
(billions of dollars per year)
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