Consider planned aggregate expenditure model: planned investment, i = $60 billion; government spending g = $50 billion; taxes are equal to $60 billion; the consumption function, c(y-t)= $80 billion + .75(y-t).
a. what is the equilibrium level of output?
b. if output in the economy started at 600 billion, what would happen to inventories and output?
c. at the equilibrium level of output: what are total consumption and savings?
d. if taxes decreased to $50 billion, what would be the new level of equilibrium output? calculate the tax multiplier?
e. if taxes stayed at $60 billion but government spending increased to $60 billion, what would be the new level of equilibrium output? calculate the government spending multiplier? how would your answers change to c, d, and e if the consumption function were instead c(y-t)= $80 billion + 0.80(y-t).

The answer is (a) Y = 520, (b) Y = 2,720, (c) (I) Y = 560, (II) Y = 560, (d) (I) Y = 560, (II) M = 3, (e) (I) Y = 560, (II) Government Multiplier = 40billion, (III) Y = 700

(a)

Explanation:

(a)

Given that

Y = I + G + ca + 0.75 ( Y - T)

Where ca = autonomous consumption, Y - T = disposable income

Substitute into the equation

Y = 60 + 50 + 80 + 0.75 ( Y - 60)

Rearrange the equation

Y - 0.75Y = 60 + 50 + 80 - 60

Factor out the variable Y

(1 - 0.75) Y = 190 - 60

Simplify

0.25Y = 130

Divide both sides by 0.25

0.25Y/0.25 = 130/0.25

Y = 520

(b)

Y = C + I + G

Since the value of output depends on the household's intention to consume

Substitute into the equation

Y = 80 + 0.75 + 600

Rearrange the equation

Y - 0.75Y = 80 + 600

Factor out the variable Y

(1-0.75)Y = 680

Simplify

0.25Y = 680

Divide both sides by 0.25

0.25Y /0.25 = 680/0.25

Y = 2,720

(c)I

Y = C + I

Y = 80 + 60

Rearrange the equation

Y - 0.75Y = 80 + 60

Factor out the variable Y

(1-0.75)Y = 80 + 60

Simplify

0.25Y = 140

Divide both sides by 0.25

0.25Y /0.25 = 140/0.25

Y = 560

(II)

Equilibrium condition S = I

C = 80 + 0.75Y =60

Rearrange the equation

Y - 0.75Y = 80 + 60

Factor out the variable Y

(1-0.75)Y = 80 + 60

Simplify

0.25Y = 140

Divide both sides by 0.25

0.25Y /0.25 = 140/0.25

Y = 560

(d)(I)

Y = I + G + ca + 0.75 (Y -T )

Where ca = autonomous consumption, Y - T = disposable income

Substitute into the equation

Y = 60 + 50 + 80 + 0.75 (Y -50)

Rearrange the equation

Y - 0.75Y = 60 + 50 + 80 - 50

Factor out the variable Y

(1-0.75)Y = 190 - 50

Simplify

0.25Y = 140

Divide both sides by 0.25

0.25Y /0.25 = 140/0.25

Y = 560

(II)

Tax Multiplier = -MPC/(1-MPC)

Because there is a decrease in tax,then the multiplier will be positive, because there is now more money in the circular flow

M= MPC /(1-MPC )

M = 0.75/(1-0.75)

0.75/0.25

= 3

The tax multiplier is 3

(e)(I)

Y = I + G + ca + 0.75 (Y -T)

Substitute into the equation

Y = 60 + 60 + 80 + 0.75 (Y -60)

Rearrange the equation

Y-0.75Y = 60 + 60 + 80 - 60

Factor out the variable Y

(1-0.75)Y = 200 - 60

Simplify

0.25Y =140

Divide both sides by 0.25

0.25Y /0.25 = 140/0.25

Y = 560

(II)

K = ▲Y/▲G

K= 1/1-MPC

K = 1/1-0.75

K = 1/0.25

K = 4

K = ▲Y/▲G

▲G = (60-50) =10

4 = ▲Y/10

Cross multiply

▲Y = 4 × 10

▲Y = 40 billion

(e)(III)

How would the answer change, if consumption function were

C (Y -T )=80billion + 0.80 (Y -T )

Y = I + G + ca + 0.75 (Y -T )

Substitute into the equation

Y = 60 + 50 + 80 + 0.80 (Y -50)

Rearrange the equation

Y - 0.80Y = 60 + 50 + 80 - 50

Factor out the variable Y

(1-0.80)Y = 190 - 50

0.2Y = 140

Divide both sides by 0.2

0.2Y /0.2 = 140/0.2

Y = 700

being born in poverty would limit the people's chances, opportunities and benefits.

this happen because of several things, such as:

- poor people tend to gain less access to good education and nutrition. this mean that their chance to obtain high paying jobs would also be limited.

- poor people tend to socialize with other poor people while the rich tend to socialize with other rich people. this means that simply throguh their social circle, rich people would have more business opportunities compared to the poor people.

- rich people tend to have more capital in their disposal. this would benefit them in business since it is far easier for them to fund their business operation compared to poor people.