What are the equations describing an economy? The economy is described by the following equations: c = 60 + 0.75(y − t) ip = 100 g = 150 nx = 30 t = 180 y* = 760 What is the multiplier in this economy? The multiplier in this economy is 4.

Equilibrium and Multiplier Effect in an Economy

23 Dec 2022

What are the equations describing an economy?

The economy is described by the following equations:

c = 60 + 0.75(y − t)
ip = 100
g = 150
nx = 30
t = 180
y* = 760

What is the multiplier in this economy?

The multiplier in this economy is 4.

Equilibrium Calculation Methods

Equilibrium in an economy can be found using two methods: direct calculation by plugging in values, and through the multiplier effect. This helps determine the necessary government spending to achieve a desired GDP level.

To find the equilibrium in an economy and the change in government spending needed to achieve a potential GDP of 3,500, two approaches can be used: direct calculation by plugging values into the equations and through determination of the fiscal multiplier.

Direct Calculation Approach

Aggregate Expenditure (AE) is defined as AE = C + I + G + X - M:

C = Consumption = 400 + 0.85(Y - T)
I = Investment = 300
G = Government Spending = 150
X = Exports = 500
M = Imports = 0.1(Y - T)
T = Taxes = 0.25Y

By setting potential GDP (Y) to 3,500 and solving for G, we adjust government spending to meet the target.

Multiplier Approach

The multiplier is calculated using the formula Multiplier = 1 / (1 - MPC (1 - tax rate)), where MPC is the marginal propensity to consume. The required change in government spending is then determined by multiplying the calculated multiplier with the desired increase in GDP.

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