Assume that the consumption schedule for a private open
economy is such that consumption C = 50 + 0.8Y. Assume further that planned
investment Ig and net exports Xn are independent of the level of real GDP and
constant at Ig = 30 and Xn = 10. Recall also that, in equilibrium, the real
output produced (Y) is equal to aggregate expenditures: Y = C + Ig+ Xn.
Calculate the equilibrium level of income or real GDP for
this economy?
What happens to equilibrium Y if Ig changes to 10? What does
this outcome reveal about the size of the multiplier?
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