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Sample Macroeconomics problem
You know, many students ask for small samples of Economics problems. Here is one of the most common Economics problems which is shared by our experts, and solve this problem with relevant formulas. Our experts break down every step clearly to offer proper guidance.
Question: Using the Keynesian Cross framework What will be the equilibrium level of national income (Y) in a country?
Solution:
To determine the equilibrium level of national income ($Y$) within the Keynesian Cross framework, we use the equilibrium condition:
$$Y = C + I + G$$
Where:
$C$ = Consumption = $200 + 0.75(Y - T)$
$I$ = Investment = $100$
$G$ = Government Spending = $150$
$T$ = Taxes = $100$
1. Calculating Initial Equilibrium ($Y_1$)
Substitute the equations into the equilibrium condition:
$$Y = 200 + 0.75(Y - 100) + 100 + 150$$
Simplify the equation:
$$Y = 200 + 0.75Y - 75 + 100 + 150$$
$$Y = 0.75Y + 375$$
Subtract $0.75Y$ from both sides:
$$0.25Y = 375$$
$$Y = \frac{375}{0.25} = 1500$$
The initial equilibrium level of national income is $1500$.
Calculating New Equilibrium ($Y_2$) with Increased Government Spending
If government spending ($G$) increases from $150$ to $200$:
$$Y = 200 + 0.75(Y - 100) + 100 + 200$$
Simplify the equation:
$$Y = 200 + 0.75Y - 75 + 100 + 200$$
$$Y = 0.75Y + 425$$
Subtract $0.75Y$ from both sides:
$$0.25Y = 425$$
$$Y = \frac{425}{0.25} = 1700$$
The new equilibrium level of national income is $1700$.
3. The Government Spending Multiplier
The multiplier effect calculates how much total output changes for every unit increase in government spending:
$$\text{Multiplier} = \frac{\Delta Y}{\Delta G} = \frac{1700 - 1500}{200 - 150} = \frac{200}{50} = 4$$
Alternatively, using the formula:
$$\text{Multiplier} = \frac{1}{1 - MPC} = \frac{1}{1 - 0.75} = \frac{1}{0.25} = 4$$
The government spending multiplier is $4$, meaning for every unit increase in $G$, national income $Y$ increases by $4$ units.
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Maybe you are still procrastinating about our service. To clear your doubts, we are giving a clear roadmap that helps you to understand how our experts help you to improve your grades.
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