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    Microeconomics Advanced Analysis

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    Assume that the consumption of 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.

    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

    Given C = 50 + 0.8Y, Ig = 30, Xn = 10 and Y = C + Ig + Xn

    Simple substitution gives

    Y = 50 + 0.8Y + 30 + ...

    Solution Summary

    Microeconomics Advanced Analysis