Re question 39 from the Level 1 Mock Exam: morning session, if someone could please explain how Y = 2,500 + 0.80 × (Y +250 – 0.30 × Y) + 500 + 0.30 × Y – 25 × r + 1,000 breaks down to;
Y = 4,200 + 0.86 × Y – 25 × r.
Y = 30,000 – 178.6 × r.
It would be much appreciated
as I’m just not getting this one.
Full questions and answer below;
39. In a simple economy with no foreign sector, the following equations apply:
Consumption function C = 2,500 + 0.80 × (Y – T)
Investment function I = 500 + 0.30 × Y – 25 × r
Government spending G = 1,000
Tax function T = –250 + 0.30 × Y
Y: Aggregate income r: Real interest rate
If the real interest rate is 3% and government spending increases to 2,000, the increase in
aggregate income will be closest to:
A. 1,000.
B. 1,163.
C. 7,143.
Answer = C
“Aggregate Output, Prices, and Economic Growth,” Paul R. Kutasovic and Richard G. Fritz
2012 Modular Level I, Vol. 2, pp. 232–240
Study Session 5-17-f
Explain the IS and LM curves and how they combine to generate the aggregate demand curve.
C is correct.
With no foreign sector, the GDP identity is Y = C + I + G.
With substitution from the equations above,
Y = 2,500 + 0.80 × (Y – T) + 500 + 0.30 × Y – 25 × r + 1,000
= 2,500 + 0.80 × (Y +250 – 0.30 × Y) + 500 + 0.30 × Y – 25 × r + 1,000.
Y = 4,200 + 0.86 × Y – 25 × r.
Y = 30,000 – 178.6 × r.
At 3%, Y = 30,000 – 178.6 × 3 = 29,464.
Alternatively, Y – 0.86Y = 4,200 – 25 × r
0.14Y = 4,200 – 256 × r.
Y = 4,200 + 0.86 × Y – 25 × r.
Y = 30,000 – 178.6 × r.
It would be much appreciated
as I’m just not getting this one.Full questions and answer below;
39. In a simple economy with no foreign sector, the following equations apply:
Consumption function C = 2,500 + 0.80 × (Y – T)
Investment function I = 500 + 0.30 × Y – 25 × r
Government spending G = 1,000
Tax function T = –250 + 0.30 × Y
Y: Aggregate income r: Real interest rate
If the real interest rate is 3% and government spending increases to 2,000, the increase in
aggregate income will be closest to:
A. 1,000.
B. 1,163.
C. 7,143.
Answer = C
“Aggregate Output, Prices, and Economic Growth,” Paul R. Kutasovic and Richard G. Fritz
2012 Modular Level I, Vol. 2, pp. 232–240
Study Session 5-17-f
Explain the IS and LM curves and how they combine to generate the aggregate demand curve.
C is correct.
With no foreign sector, the GDP identity is Y = C + I + G.
With substitution from the equations above,
Y = 2,500 + 0.80 × (Y – T) + 500 + 0.30 × Y – 25 × r + 1,000
= 2,500 + 0.80 × (Y +250 – 0.30 × Y) + 500 + 0.30 × Y – 25 × r + 1,000.
Y = 4,200 + 0.86 × Y – 25 × r.
Y = 30,000 – 178.6 × r.
At 3%, Y = 30,000 – 178.6 × 3 = 29,464.
Alternatively, Y – 0.86Y = 4,200 – 25 × r
0.14Y = 4,200 – 256 × r.