## [answered] A graphical approach to equilibrium GDP in a private closed

?graphical approach to equilibrium GDP in a private closedeconomy

The following graph shows the consumption function (C) for a hypothetical private closed economy and a 45-degree line along which aggregate expenditure equals real GDP (AE=Y). Recall that a private closed economy does not have government and does not trade with the rest of the world (so G=0 and (X-M)=0). In a private closed economy, real GDP is equal to disposable income. At the current real interest rate, the level of investment in this economy is equal to \$25 billion at each level of real GDP. Use the blue line (circle symbols) to plot this economy's initial aggregate expenditure line, (C + I). Then, use the black point (X symbol) to indicate this economy's initial equilibrium output. Dashed drop lines will automatically extend to both axes. (Hint: You can see two of the coordinates along the consumption function by mousing over the green triangles on the graph.)

At the level of equilibrium output you just indicated, the level of saving is equal to? ?
3. A graphical approach to equilibrium GDP in a private closedeconomy

The following graph shows the consumption function (C) for a hypothetical private closed economy and a 45-degree line along which aggregate expenditure equals real GDP (AE=Y). Recall that a private closed economy does not have government and does not trade with the rest of the world (so

G=0 and (X-M1=91. In a private closed economy, real GDP is equal to disposable income.

At the current real interest rate, the level of investment in this economy is equal to \$25 billion at each level of real GDP. Use the blue line (circle

symbols) to plot this economy's initial aggregate expenditure line, (C + I). Then, use the black point (X symbol) to indicate this economy's initial

equilibrium output. Dashed drop lines will automatically extend to both axes. (Hint: You can see two of the coordinates along the consumption

function by mousing over the green triangles on the graph.) 800 o 750

700 Aggregate Expenditure 650 'f 600 o

=

!= 550

500 c 450

o o x

U 400

o 350

6 o

o o) o 300

250

200

150

100

50

0 100 200 300 400 500 Real GDP At the level of equilibrium output you just indicated, the level of saving is equal to

At an output level of \$350 billion, aggregate expenditure will be

business inventories. Firms will respond to this situation by: Increasing production

Leaving production unchanged

Decreasing production real GDP and firms v/ill experience tn At an output level of \$450 billion, aggregate expenditure will be real GDP and firms will experience in business inventories. Firms will respond to this situation by:

Decreasing production

Leaving production unchanged Increasing production Suppose the real interest rate falls and the level of investment in this economy increases by \$25 billion. Use the blue line (circle symbols) to show the economy's aggregate expenditure line, (C + I), after the increase in investment. Then use the gray point (star symbol) to show the economy's new

equilibrium output. Dashed drop lines will extend to both axes. Hint: Start with your aggregate expenditure line from the previous graph. 800 o 750

700 650 Aggregate Expenditure with higher real interest rate 600 s a 550

o

f ='

1

C

q)

o

x 500 Equilibrium with higher real interest rate 450 tu 400

o 350

o o

o o, o 300 250

200

150

100

50

0 100 200 300 400 500 REAI GDP The simple spending multiplier for this private closed economy is

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