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    Equilibrium Level of Income or GDP

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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 = C + Ig + Xn.

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

    b. 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 Preview

    a. Computation of the equilibrium level of income:

    C= 50+.80Y

    Y = C + Ig + Xn
    Y = 50+.80Y+30+10
    Y-.80Y = 50 + 30 + 10
    .20Y = 90
    .20Y/.20 = 90 ...

    Solution Summary

    The solution shows the computation of the equilibrium level of income or GDP. It shows the computation of the income given a change in investment.