Suppose a closed economy has an intended investment of 150 and an aggregate consumption function given by C = 250 + 0

Economics May 26, 2021

Suppose a closed economy has an intended investment of 150 and an aggregate consumption function given by C = 250 + 0.75Yd. Suppose also that the government spends 50 but collects no taxes.

What is equilibrium output and income?

(round your answer to the nearest whole value)

Expert Solution

Computation of the equilibrium output and income:-

C = 250 + 0.75Yd

I = 150

G = 50

Yd = (Y - T)

T = 0

At Equilibrium Y = C + I + G

Y = (250 + 0.75Yd) + 150 + 50

= 450 + 0.75*(Y-T)

= 450 + 0.75*(Y-0)

Y = 450 + 0.75Y

Y - 0.75Y = 450

0.25Y = 450

Y = 450 / 0.25

= 1,800

Hence, the equilibrium output and income = 1,800

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