Assume that the consumption schedule for a private open economy is such that con

Question

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

Explanation / Answer

1. substitute c into the equation along with the other variables Y=C+Ig+Xn Y = 50+0.8Y + 30 +10 Y = 90 + 0.8Y Y(1-0.8) = 90 Y = 90/0.2 = 450 2. If Ig changes to 10, the 90 in the numerator goes down to 70 i.e. Y = 350 and the whole thing goes down by 20/0.2 = 100. the size of the multiplier changes whatever is on top by 5 times (i.e. 1/0.2 = 5)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.