Equilibrium GDP in a Closed Keynesian Economy

Understanding Equilibrium GDP in a Closed Keynesian Economy

A closed Keynesian economy operates without international trade and is characterized by government intervention to maintain stability. In this scenario, we consider the following equations:

C = 500 + 0.75Y

I = 300

G = 400

Calculating Equilibrium GDP

To determine the equilibrium GDP, we need to find the point where total spending (aggregate demand) equals the total output (GDP). In a closed Keynesian economy, the equilibrium GDP is achieved when C + I + G is equal to Y.

Let's calculate it step by step:

Consumption (C) = 500 + 0.75Y

Investment (I) = 300

Government spending (G) = 400

Aggregate Demand (AD) = C + I + G

AD = (500 + 0.75Y) + 300 + 400

AD = 500 + 0.75Y + 700

AD = 1200 + 0.75Y

Set AD equal to Y for equilibrium:

1200 + 0.75Y = Y

0.25Y = 1200

Y = 4800

Conclusion

The equilibrium GDP in the closed Keynesian economy is 4800.

In conclusion, the equilibrium GDP is determined by the equality of total output and total spending in the economy. With the given consumption, investment, and government spending functions, we calculated the equilibrium GDP to be 4800.

For further understanding of Equilibrium GDP, you can refer to the link provided.