Question: Fredonia has the following consumption function: C = 100 + 0.8DI Firms in Fredonia always invest $700 and net exports are 0, initially. The government

Fredonia has the following consumption function:

C = 100 + 0.8DI

Firms in Fredonia always invest $700 and net exports are 0, initially. The government budget is balanced with spending and taxes both equal to $500.

a. Find the equilibrium level of GDP.

b. How much is saved? Is saving equal to investment?

c. Now suppose that an export-promotion drive succeeds in raising net exports to $100. Answer (a) and (b) under these new circumstances.


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