High School

We appreciate your visit to Suppose GDP is composed of consumption C investment I and government spending G Round your answers to the nearest whole number 1 If autonomous consumption. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!

Suppose GDP is composed of consumption (C), investment (I), and government spending (G).

Round your answers to the nearest whole number.

1. If autonomous consumption is 50, the marginal propensity to consume (MPC) is 0.5, the tax rate is 15 percent, investment is 15, and government spending is 50, then what is the equilibrium output?

2. If autonomous consumption, MPC, investment, and government spending are unchanged, but the tax rate increases to 25 percent, what would the equilibrium output be?

3. If autonomous consumption, MPC, and investment are unchanged, but the tax rate increase is accompanied by government spending increasing to 70, what would the equilibrium output be?

Answer :

Final answer:

The equilibrium output initially is 230. When the tax rate increases, it decreases the marginal propensity to consume (MPC), leading to lower equilibrium output. However, when government spending increases to 70, it counteracts the effect of increased tax and raises equilibrium output to 270.

Explanation:

Equilibrium output in an economy is established at the point where the sum of consumption (C), investment (I), and government spending (G) is equal to the Gross Domestic Product (GDP). The consumption function, which is upward-sloping, shows the relationship between national income and consumption. The marginal propensity to consume (MPC) is the amount consumed out of an additional dollar of income, and a change in this will shift the consumption function.

In our case, the initial equilibrium output would be determined by the formula: Y = 1/(1-MPC)*(C + I + G) = 1/(1-0.5)*(50 + 15 + 50) = 230. When the tax rate increases to 0.25, the equilibrium output would still be computed with the same formula but MPC reduces because people have less disposable income due to higher taxes, that reduces consumption. Increases in government spending will shift the aggregate expenditure function up, leading to an increase in the equilibrium output. So, with increased government spending to 70, the formula becomes Y = 1/(1-MPC)*(C + I + G) = 1/(1-0.5)*(50 + 15 + 70) = 270.

Learn more about Equilibrium Output here:

https://brainly.com/question/27993527

#SPJ11

Thanks for taking the time to read Suppose GDP is composed of consumption C investment I and government spending G Round your answers to the nearest whole number 1 If autonomous consumption. We hope the insights shared have been valuable and enhanced your understanding of the topic. Don�t hesitate to browse our website for more informative and engaging content!

Rewritten by : Barada