An economy is described by the following equations: c = 1,500 + 0.9 (y – t)i p = 1000g = 1,500nx = 100t = 1,500y* = 8,800the multiplier for this economy is 10.find the effect on short-run equilibrium output of: a. an increase in government purchases by 100 from 1,500 to 1,600.instruction: enter your response as an integer value. short-run equilibrium output will increase to .b. a decrease in tax collections from 1,500 to 1,400 (leaving government purchases at their original value of 1,500).instruction: enter your response as an integer value. short-run equilibrium output will increase toc. a decrease in planned investment spending by 100 from 1,000 to 900 (leaving government purchases and taxes unchanged at their original values of 1,500).instruction: enter your response as an integer value. short-run equilibrium output will decrease to .

a. Increases by 1000 to 9800

b. Increases by 900 to 9700

c. Decreases by 1000 to 7800

Explanation:

The multiplier in economics is a concept that measures the rate of change in output as a result of a unit change in spending. In other words, it explains that a given change in consumption or investment spending will result in a greater change in aggregate output, thus called multiplier

a. Given Y*=8800 in the question and Multiplier= 10, we can calculate the effect of a 100 unit increase in government purchases:

∆Y/∆G=1/(1-MPC)= 10

Thus, ∆Y/100=10

∆Y=1000 ; Thus if government purchases increases by 100, economic output increases by 1000, from 8800 to 9800 (8800+1000).

b. A decrease in tax collections from 1,500 to 1,400 implies 100 units tax reduction

The tax multiplier is given as

∆Y/∆T=(-mpc)/(1-mpc)

Mpc = 0.9, (it was gotten from consumption equation C)

Thus, ∆Y/(-100)=(-0.9)/(1-0.9)

∆Y/(-100)=-9  

∆Y= 900; This is an increase in output.

Thus, a decrease in tax collections by 100 increases economic output by 900 to 9700 (8800+900)

c. A decrease in planned investment spending by 100 from 1,000 to 900 is evaluated thus:

(∆Y/∆I)= 1/(1-MPC)= 10

∆Y/(-100)= 10

∆Y= -1000; This implies a decrease in economic output by 1000 from 8800 to 7800 (8800-7800)

Thus, a decrease in planned investment spending by 100 from 1,000 to 900 decreases economic output to 7800

NOTE: MPC is marginal propensity to consume. It is the slope of the consumption function.

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