Consider an economy with the following values: Autonomous Consumption = 1,200Autonomous Taxes = 1,750Planned Investment = 2,800Government Expenditure = 1,950Autonomous Net Exports = 350Marginal Propensity to Consume = 0.7Marginal tax rate = 0.16Marginal propensity to import = 0.08 Calculate the equilibrium level of income. Provide answer to 2 decimal points
Question
Consider an economy with the following values: Autonomous Consumption = 1,200Autonomous Taxes = 1,750Planned Investment = 2,800Government Expenditure = 1,950Autonomous Net Exports = 350Marginal Propensity to Consume = 0.7Marginal tax rate = 0.16Marginal propensity to import = 0.08 Calculate the equilibrium level of income. Provide answer to 2 decimal points
Solution 1
To calculate the equilibrium level of income, we first need to calculate the multiplier. The multiplier is calculated as 1 / (1 - Marginal Propensity to Consume * (1 - Marginal tax rate) + Marginal propensity to import).
Let's plug in the values:
Multiplier = 1 / (1 - 0.7 * (1 - 0.16) + 0.08) = 2.38
Next, we calculate the Autonomous Spending, which is the sum of Autonomous Consumption, Planned Investment, Government Expenditure, and Autonomous Net Exports.
Autonomous Spending = 1,200 + 2,800 + 1,950 + 350 = 6,300
Finally, we calculate the equilibrium level of income by multiplying the Autonomous Spending by the Multiplier.
Equilibrium Level of Income = Autonomous Spending * Multiplier = 6,300 * 2.38 = 14,994
So, the equilibrium level of income is 14,994.00.
Solution 2
To calculate the equilibrium level of income, we first need to calculate the multiplier. The multiplier is calculated as:
Multiplier = 1 / (1 - Marginal Propensity to Consume * (1 - Marginal tax rate) + Marginal propensity to import)
Substituting the given values:
Multiplier = 1 / (1 - 0.7 * (1 - 0.16) + 0.08) Multiplier = 1 / (1 - 0.588 + 0.08) Multiplier = 1 / 0.492 Multiplier = 2.03 (rounded to 2 decimal places)
Next, we calculate the autonomous spending, which is the sum of autonomous consumption, planned investment, government expenditure, and autonomous net exports.
Autonomous Spending = Autonomous Consumption + Planned Investment + Government Expenditure + Autonomous Net Exports Autonomous Spending = 1,200 + 2,800 + 1,950 + 350 Autonomous Spending = 6,300
Finally, we calculate the equilibrium level of income by multiplying the autonomous spending by the multiplier.
Equilibrium Level of Income = Autonomous Spending * Multiplier Equilibrium Level of Income = 6,300 * 2.03 Equilibrium Level of Income = 12,789
So, the equilibrium level of income is 12,789.00.
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