I need help with this question. I do know the procedure to calculate the equilibrium income and can solve the following question without taking the employment factors in mind. However, I just can't get how the employment factor figures in the equilibrium calculations.
Suppose labour and capital are used in fixed proportions in the production of output in a closed economy. Suppose the existing capital equipment is utilised fully but a quarter of the labor force is unemployed. Let $Y$,$C$ and $I$ represent aggregate levels of income, consumption, and investment expenditure in the economy in dollars at constant prices. Let $C=100+0.6Y, I=500, G=200$
- Calculate the level of income in the economy.
- If the government raises its nominal expenditure to 400, then what is the increase in real income in the economy?
If the government raises its nominal expenditure to 400, then what is the fall in the percentage of unemployed in the economy?
This is how I've solved it :
Y=C+I+G = 800+0.6 Y So Y = 2000
With 400 as government expenditure, the new equilibrium income will be 2500. So the increase in the income is 500.
I think this will be solved using Okun's law:
But I'm not sure how to proceed.