Answer to Question #194326 in Macroeconomics for Kgomotso

Question

a) Given the following simple Keynesian Model: Y = C + I + G + X-M, 

where 

Consumption schedule is given as C= 100 +0.75Y

Investment (I) = 50

Government (G) = 100

and Net Export (X-M) = 20

i. Calculate the Equlibrium Level of Income [4 Marks]

ii. Calculate the size of Consumption at the Equilibrium Level

Answer 1

i)

Using the equilibrium condition in the Keynesian Model:

$Y = C+ I+ G + NX$ , substituting the given values

$Y=(100 +0.75Y) + 50 +100 + 20,$ simplifying it:

$Y=270+0.75Y,$

$Y-0.75=270$

$0.25Y=270$

$Y=\frac{270}{0.25}=1080$

Thus, the equilibrium level of income amounts to 1080

ii)

At Y equals to 1080, the size of consumption is:

$C= 100 +0.75Y, put Y =1080$

$=100 +0.75×1080$

$=100+810$

$=910$

Hence, the consumption expenditure amounts to 910.