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The economy has a consumption function of $50b + 0.75Y and an equilibrium level of GDP of $1000b. There is now an increase in investment of $25b. What is the new equilibrium level of GDP?Select one:a.$1200bb.$1100bc.$1250bd.$1400b

Question

The economy has a consumption function of 50b+0.75YandanequilibriumlevelofGDPof50b + 0.75Y and an equilibrium level of GDP of 1000b. There is now an increase in investment of 25b.WhatisthenewequilibriumlevelofGDP?Selectone:a.25b. What is the new equilibrium level of GDP?Select one:a.1200bb.1100bc.1100bc.1250bd.$1400b

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Solution

The equilibrium level of GDP is determined by the equation:

Y = C + I

where Y is the GDP, C is the consumption, and I is the investment.

Given the consumption function C = 50b+0.75YandaninitialequilibriumlevelofGDPof50b + 0.75Y and an initial equilibrium level of GDP of 1000b, we can substitute these values into the equation to find the initial level of investment:

1000b=1000b = 50b + 0.75($1000b) + I

Solving for I gives us:

I = 1000b−1000b - 50b - 750b=750b = 200b

Now, there is an increase in investment of 25b,sothenewlevelofinvestmentis25b, so the new level of investment is 200b + 25b=25b = 225b.

We can now substitute the new level of investment and the consumption function back into the equilibrium equation to find the new equilibrium level of GDP:

Y = 50b+0.75Y+50b + 0.75Y + 225b

Solving for Y gives us:

0.25Y = 50b+50b + 225b

Y = 4(50b+50b + 225b) = $1100b

So, the new equilibrium level of GDP is $1100b.

The answer is:

b. $1100b

This problem has been solved

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