The table shows a consumption schedule. All figures are in billions of dollars. Refer to the above information. If lump-sum taxes were $20 billion, planned investment $45 billion, net exports zero, and government purchases $20 billion, then equilibrium GDP would be:
A) $640 billion
B) $680 billion
C) $720 billion
D) $760 billion

Question

The table shows a consumption schedule. All figures are in billions of dollars.  Refer to the above information. If lump-sum taxes were $20 billion, planned investment $45 billion, net exports zero, and government purchases $20 billion, then equilibrium GDP would be:
A) $640 billion 
B) $680 billion 
C) $720 billion 
D) $760 billion

Quizplus · Accepted Answer

Equilibrium GDP is where aggregate output is equal to aggregate expenditures. We can calculate equilibrium GDP by setting AE (Aggregate Expenditure) equal to GDP:

AE = C + I + G + NX

where C = 200 + 0.75(Y - T), I = 45, G = 20, NX = 0, and T = $20 billion (lump-sum taxes).

Substituting the values, we get:

Y = AE = C + I + G + NX 
Y = (200 + 0.75(Y - 20)) + 45 + 20 + 0 
Y = 265 + 0.75Y - 15 
0.25Y = 250 
Y = $720 billion

Therefore, the equilibrium GDP would be $720 billion.

The Table Shows a Consumption Schedule