The economy of Bananaland can be characterized by Equation 9.5.
EQUATION 9.5:
C = 2,000 + 0.75Yd
T = 200
G = 400
I = 500
-Refer to Equation 9.5. If government spending in Bananaland increases by $50, equilibrium output increases by

Question

Quizplus · Accepted Answer

The equation for equilibrium output (Y) is:
Y = C + I + G
Y = (2,000 + 0.75Yd) + 500 + 400
Y = (2,000 + 0.75(Y-T)) + 500 + 400 (substituting Yd = Y-T)
Y = (2,000 + 0.75(Y-200)) + 500 + 400 (substituting T = 200)

To find the change in equilibrium output, we can use the following formula:
Change in Y = Change in G x (1/marginal propensity to save)

The marginal propensity to save (MPS) can be found by subtracting the marginal propensity to consume (MPC) from 1. The MPC is the coefficient of Yd in the consumption function, which is 0.75. Therefore, the MPS is 1 - 0.75 = 0.25.

Plugging in the numbers, we get:
Change in Y = 50 x (1/0.25)
Change in Y = 200

Therefore, a $50 increase in government spending will lead to a $200 increase in equilibrium output.

The Economy of Bananaland Can Be Characterized by Equation 9