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=80+0. 8y Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at lg=50andXn=10. Recall also that in equilbrium. the real output produce (y) is equal to aggregate expenditure y=C+Ig+G+Xn Instructions: Round your answer to the nearest whole number. what is the equlibrium level of income or real GDP for this economy? Equilibrium GDP (y)=$ what happen? to equilibrium y if Ig changes to 307 Equilibrium GDP (y)=$ what does this outcome revel about the size of the multipler? mulitipler

Explanation / Answer

Y = 80 + 0.8Y + 50 + 0 + 10 [Since data on G is not given, G is considered 0]

(a)

0.2Y = 140

Y = 700

(b) If Ig = 30,

(i) Y = 80 + 0.9Y + 30 + 0 + 10

0.2Y = 120

Y = 600

(ii) Multiplier = 1 / (1 - marginal propensity to consume)

= 1 / (1 - 0.80) = 1 / 0.2

= 5

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