$$\begin{array} { | c | c | }
\hline G D P & C \
\hline \$ 140 & \$ 150 \
\hline 180 & 180 \
\hline 220 & 210 \
\hline 260 & 240 \
\hline 300 & 270 \
\hline
\end{array}$$ The accompanying schedule contains data for a private closed economy. All ?gures are in billions. If gross investment is $10 at all levels of GDP, the equilibrium GDP will be
A) $300.
B) $260.
C) $220.
D) $180.

Question

$$\begin{array} { | c | c | } 
\hline G D P & C \
\hline \$ 140 & \$ 150 \
\hline 180 & 180 \
\hline 220 & 210 \
\hline 260 & 240 \
\hline 300 & 270 \
\hline
\end{array}$$ The accompanying schedule contains data for a private closed economy. All ?gures are in billions. If gross investment is $10 at all levels of GDP, the equilibrium GDP will be
A) $300.
B) $260.
C) $220.
D) $180.

Quizplus · Accepted Answer

Equilibrium GDP is where aggregate expenditure equals output. In this case, aggregate expenditure is given by $150+0.9	imes GDP$ (where $0.9$ represents the marginal propensity to consume), and output is given by $GDP$. Therefore, the equation we need to solve for equilibrium GDP is $GDP = 150 + 0.9	imes GDP + 10$. Simplifying, we get $0.1	imes GDP = 160$, or $GDP = 1600/10 = 160$. However, we need to subtract the initial investment of $10$ to get the equilibrium GDP, which is $160-10 = 150$. This answer is not given in the choices, so we need to try different levels of GDP to see which one gives us equilibrium. Trying $GDP = 180$, we get aggregate expenditure of $150+0.9	imes 180 + 10 = 337$, which is greater than output. Trying $GDP = 220$, we get aggregate expenditure of $150+0.9	imes 220 + 10 = 367$, which is also greater than output. Trying $GDP = 260$, we get aggregate expenditure of $150+0.9	imes 260 + 10 = 397$, which is greater than output. Finally, trying $GDP = 300$, we get aggregate expenditure of $150+0.9	imes 300 + 10 = 427$, which is greater than output. Therefore, the only level of GDP that gives us equilibrium is $GDP = 220$.

The Accompanying Schedule Contains Data for a Private Closed Economy