Let C = 200 + .8(Y-T),planned investment equals 150,and T equals 200.If the equilibrium level of income is 2,000,then the level of government spending needed to make this true is
A)210.
B)250.
C)50.
D)10.
E)none of the above.

Question

Quizplus · Accepted Answer

The equilibrium level of income is the level of income at which planned aggregate expenditure equals aggregate income. In this case, planned aggregate expenditure is equal to consumption plus planned investment plus government spending, or C + I + G. We know that C = 200 + .8(Y-T), I = 150, and T = 200. So, planned aggregate expenditure is equal to 200 + .8(Y-T) + 150 + 200 = 550 + .8Y - .8T.At equilibrium, planned aggregate expenditure equals aggregate income, or Y. So, we have 550 + .8Y - .8T = Y. Solving for Y, we get Y = 2,000.Now, we can plug in Y = 2,000 and T = 200 into the equation for planned aggregate expenditure to find the level of government spending needed to make this true. We get 550 + .8(2,000) - .8(200) = 2,210. So, the level of government spending needed to make the equilibrium level of income equal to 2,000 is 2,210 - 2,000 = 210.