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?
a. Computation of the equilibrium level of income:
Y = C + Ig + Xn
Y = 50+.80Y+30+10
Y-.80Y = 50 + 30 + 10
.20Y = 90
.20Y/.20 = 90 ...
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.