Question

Given, C = 200 + 0.75Y and income equilibrium is 1200 million. What is the new equilibrium income level when there is an increase in government spending by 50 million? Assume Y = 1200 million.

Answer 1

1150

Step-by-step explanation:

To find the new equilibrium income level when there is an increase in government spending by 50 million, we first need to determine the new equation for aggregate demand (AD).

The given aggregate demand equation is:

C = 200 + 0.75Y

In equilibrium, aggregate demand (AD) is equal to income (Y). So, we set C equal to Y:

Y = 200 + 0.75Y

Now, let's calculate the current equilibrium income level when Y = 1200 million:

Y = 200 + 0.75(1200)

Y = 200 + 900

Y = 1100 million

The current equilibrium income level is 1100 million.

Next, we need to find the new equilibrium income level after the increase in government spending by 50 million. Let's denote the new government spending as G' = G + 50 million.

The new aggregate demand equation becomes:

C = 200 + 0.75Y + G'

Substitute Y = 1200 million and G' = 50 million into the equation:

Y = 200 + 0.75(1200) + 50

Y = 200 + 900 + 50

Y = 1150 million

The new equilibrium income level, with the increase in government spending by 50 million, is 1150 million.

Answer 2

The new equilibrium income level is 1400 million.