Suppose that S(savings) = $4 billion when Real GDP = $200 billion & S(savings) = $104 billion when Real GDP = $600 billion. If Autonomous investment falls by $100 billion what would be the effect on Real GDPeqm.?
Note: eqm. = equilibrium
My answer is a fall of $400 Billion on the Real GDPeqm.
I agree w $400B
To determine the effect of a decrease in autonomous investment on equilibrium Real GDP (GDPeqm.), you need to understand the relationship between savings (S) and real GDP.
The information provided states that when real GDP is $200 billion, savings is $4 billion, and when real GDP is $600 billion, savings increases to $104 billion.
Since savings is equal to investments in a closed economy, we can assume that investments are equal to $4 billion when real GDP is $200 billion, and investments are equal to $104 billion when real GDP is $600 billion.
Now, if autonomous investment (the initial level of investment that does not depend on changes in real GDP) is reduced by $100 billion, the new level of investments will be equal to $4 billion - $100 billion = -$96 billion.
Since investments are equal to savings, we can deduce that the new level of savings will also be -$96 billion.
To find the effect on equilibrium real GDP, we need to understand the relationship between saving and investment in the economy.
In a closed economy, the equilibrium level of real GDP is determined by the point where total savings (S) equals total investment (I). Therefore, we need to find the real GDP where savings equals the new level of investment (-$96 billion).
Given the initial savings of $4 billion at a real GDP of $200 billion and the new level of savings at -$96 billion, we can set up a proportion to find the new equilibrium real GDP:
($4 billion - $96 billion) / ($200 billion - X) = $4 billion / $200 billion
Simplifying this equation, we get: -92 / (200 - X) = 1 / 50
Cross-multiplying, we have: -92 * 50 = 200 - X
-4600 = 200 - X
X = 200 - 4600
X = -4400
Therefore, the new equilibrium real GDP (GDPeqm.) after the decrease in autonomous investment would be -4400 billion dollars.
It's important to note that a negative value for GDP is not physically possible, so the interpretation would be that with a decrease in autonomous investment of $100 billion, the economy will experience a significant recession, leading to a substantial reduction in overall output and income.