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Equilibrium Level of Income or GDP

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?

Solution Preview

a. Computation of the equilibrium level of income:

Given:
C= 50+.80Y
Ig=30
Xn=10

Solution:
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.

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