Consider a small economy that is closed to trade, sothat its net exports are zero. Suppose that the economy has the following consumption function,
where C is consumption, Y is income (real GDP), Ip is planned investment, G is government purchases, and T is taxes:
0 = 40 + 0.5 x (Y - T)
Suppose G = $165 billion, Ip = $50 billion, and T = $10 billion.
Given the consumption function and the fact that, in a closed economy, planned expenditure can be calculated as Y = C +Ip + G , the equilibrium income level is $........... billion.
Suppose that government purchases are increased by $150 billion. The new equilibrium level of income will be equal to billion.
Based on the effect of the change in government purchases on equilibrium income, you can tell that this economy's multiplier is equal to v.

Answer rating: 100% (QA)

C 40 05Y T G 165 Ip 50 T 10 Y C Ip G 40 05Y 10 50 165 255 ... View the full answer