 # Economics Questions

## Question

In a closed economy, you are given the following information.
(a) Write down the equilibrium condition in the product market and calculate the equilibrium level of output (Y*), consumption spending (C*), saving (S*), and tax revenue (T*).
(b) Calculate the level of planned aggregate expenditures and unplanned inventory change when output (=Y) is \$500 and \$1000 per year, and describe the supply responses of businesses, respectively.
(c) Suppose the equilibrium level of output you calculated in part (a) is \$250 below the full employment level of output (Yf). Calculate how much government spending is necessary to stimulate the economy and take it to the full employment level (Yf)?
(d) Go back to the original data, but also include the following functions to turn the economy an open one: EX=30 and IM=0.10Y. Calculate new equilibrium level of output (Y*) and show how much change in taxes is necessary to take the economy from this new equilibrium level to the full employment level of output (Yf)? (Do not forget to specify the nature of the change in taxes: increase or decrease? Why?).
(e) Draw the Keynesian cross diagram by identifying the positions described in part (a), (b), (c), and (d) above. (Do not forget to label axes. Show all major intersection points including axes and their numerical values!).

C= 85+ 0.75(Y − T )
T= 20+ 0.2Y
I= 30(CONSTANT)
G= 170

## Solution Preview

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(a) Write down the equilibrium condition in the product market and calculate the equilibrium level of output (Y*), consumption spending (C*), saving (S*), and tax revenue (T*).
The equilibrium condition in the product market is given as
Y=C+I+G
For solving for Y :
Y=85+.75(Y-T)+30+170
Y=285+.75(Y-T)
Y=285+.75(Y-20-.2Y)
Y=285+.75Y-15-.15Y
Y=270+.6Y
Y=675...

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