Free Keynesian Economics and AD-AS Quiz: Income Determination, Multiplier, Supply Shocks, Business Cycle and Phillips Curve

Keynesian Concepts, Aggregate Demand/Aggregate Supply, and Macroeconomic Stabilisation

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In a closed economy with a constant price level, consumption is $C=100+0.75Y$, planned investment is $I=150$ and government spending is $G=50$ (all in billions of dollars). Taxes are lump-sum and included in the consumption function. Full-employment income is$1,400billion.

What is the equilibrium level of national income, and by how much must government spending rise to reach full employment?

Select one option.

Equilibrium income is $1,200 billion; government spending must rise by $200 billion
Equilibrium income is $1,200 billion; government spending must rise by $150 billion
Equilibrium income is $1,200 billion; government spending must rise by $50 billion
Equilibrium income is $400 billion; government spending must rise by $50 billion
Equilibrium income is $1,400 billion; no change in government spending is needed

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