By what value equilibrium output and aggregate demand will change, when the value of parameter c changes from 0.8 to 0.5 at a given $\bar A = 50$?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 150
$\bar A = 50$
Initial $c_1$=0.8
New $c_2$=0.5
Formula for equilibrium output: Y = $\bar A = 50$/ ( 1- c)
Initial equilibrium output ($Y_1$)=50 / (1 - 0.8) = 50 / 0.2 = 250
New equilibrium output ($Y_2$) =50 / (1 - 0.5) = 50 / 0.5 = 100
Change in equilibrium output (ΔY) =Y2−Y1 = 100−250 =−150
This means equilibrium output decreases by 150 when c falls from 0.8 to 0.5.