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In-Class Assignment Mathematical Model of AD Name

This document provides information about an assignment to model an economy called Casolari Land. It defines the consumption function, investment levels, government spending and taxes, and equilibrium conditions. Students are asked to (a) calculate the original equilibrium GDP, (b) determine the new equilibrium if government spending increases, and (c) recommend government actions if potential output is $5,000 according to Keynesian philosophy.

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Aj Johnson
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39 views

In-Class Assignment Mathematical Model of AD Name

This document provides information about an assignment to model an economy called Casolari Land. It defines the consumption function, investment levels, government spending and taxes, and equilibrium conditions. Students are asked to (a) calculate the original equilibrium GDP, (b) determine the new equilibrium if government spending increases, and (c) recommend government actions if potential output is $5,000 according to Keynesian philosophy.

Uploaded by

Aj Johnson
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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In-Class Assignment

Mathematical Model of AD
Name: ____________________

1. Suppose the following information reflects the closed economy of Casolari Land.
The Consumption Function is such that C=300+.75(DI), Investment is fixed at
$450 and the Government has a balanced budget, where both purchases and taxes
equal $1,000.

These equations describe the economy:

DI=Y-T [Disposable income is total income less taxes.]


C= 300 + .75(DI) [Consumption is determined by disposable income.]
E=C+I+G+NX [Aggregate demand is the total of consumption, investment,
government purchases, and net exports.]
E=Y* [In equilibrium, total spending matches total income or total output]

(a) Describe the steps you would take to calculate the equilibrium level of
GDP for this economy (Y*).
(b) Suppose the government chooses to increase its Purchases by $500.
Describe the steps you would take to determine the new equilibrium level
of output?
(c) Assume the Potential level of output is $5,000, according to the Keynesian
philosophy what actions should the government take? Describe how you
arrived at your conclusions.

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