1. In a classical model of a closed economy, assume the equilibrium GDP (Y) is $7000, Consumption C is given by the equation.C = 270 + 0.8 (Y-T).Taxes (T) is equal to $800 and government spending G is $500.What is the equilibrium investment?
Question
1. In a classical model of a closed economy, assume the equilibrium GDP (Y) is 800 and government spending G is $500.What is the equilibrium investment?
Solution
In a closed economy, the equilibrium GDP (Y) is the sum of consumption (C), investment (I), and government spending (G). This relationship can be expressed by the following formula:
Y = C + I + G
We can rearrange this formula to solve for investment (I):
I = Y - C - G
Substituting the given values into the consumption function:
C = 270 + 0.8 * (Y - T) C = 270 + 0.8 * (7000 - 800) C = 270 + 0.8 * 6200 C = 270 + 4960 C = 5230
Then, substituting the values of Y, C, and G into the investment formula:
I = 7000 - 5230 - 500 I = 1270
So, the equilibrium investment in this economy is $1270.
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