Q1 Equilibrium GDP

Consider a simple 2-sector economy:

C = 100 + 0.8Y
I = 60

(a) At output = 900, calculate the total planned expenditure.

Is the economy in equilibrium? Why/Why not?

(b) Explain with the aid of a diagram how equilibrium will be restored in (a).

Q2 Antarctica

You are given the following information about the economy of Antarctica: Autonomous
consumption expenditure is $1 billion, and the marginal propensity to consume is 0.95.
Investment is $4 billion, government expenditure on goods and services is $4 billion, and net
taxes are a constant $4 billion – they don’t vary with income.

(a) What is the consumption function?

(b) What is the equation that describes the aggregate expenditure curve?
(c) Calculate equilibrium expenditure.
(d) If investment falls by $3 billion, what is the change in equilibrium expenditure and what is
the size of the multiplier?