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Calculating Macroeconomic Equilibrium and the Multiplier

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Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30 and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig+ Xn.

Calculate the equilibrium level of income or real GDP for this economy?

What happens to equilibrium Y if Ig changes to 10? What does this outcome reveal about the size of the multiplier?

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Solution Summary

This solution shows how to calculate the equilibrium level of real GDP for an economy where the components of spending are known. A second calculation shows how to calculate the spening multiplier by analyzing the change in equilibrium GDP resulting from a change in spending.

Solution Preview

1.
At equilibrium:
Y = C + Ig + Xn
Y = (50 + 0.8Y) + 30 + 10
Y - ...

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