Rubinland is a small island economy that has no taxes, no transfer payments, no

Question

Rubinland is a small island economy that has no taxes, no transfer payments, no government purchases, no exports, and no imports. Rubinland's economy is represented by the following equations:

C = 5,000 + 0.6Y
I = 5,000

where C represents consumption, I represents planned investment, and Y represents aggregate income.

7.2. Suppose Rubinland firms are suddenly optimistic about future profits. Planned investment increases from $5,000 to $6,000. What is the change in equilibrium output?




A. $2,225

B. $2,500

C. $5,000

D. $3,700

Explanation / Answer

Y=C+I Y=5,000+.6Y+I Y-.06Y=5,000+I .4Y=5,000+I Y=12500+2.5*I So if i increases by 1000, y will increase by 2.5*1000 = 2500

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