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C = 500 + 0.8 Y, I = 400, G = 400, (X - M) = -100

Solve for GDP.

What would be the impact on GDP if the government spending increased to 500?

Why would the increase in GDP be greater than the increase of a $100 increase in government spending?

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Solution Summary

The expert solves an equation for GDP. The impact on GDP if the government spending increased to 500 is determined. Why the increase in GDP would be greater than the increase of a $100 increase in government spending is determined.

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1. Solve for GDP.
Substitute C, I, G and (X-M) into the following aggregate demand function:
Y = C + I + G + (X-M)
Y = 500 + 0.8 Y + 400 + 400 -100
0.2Y = 1200
Y = 6000

2. What would be the impact on GDP if the government spending increased to 500?
From C = 500 + 0.8 Y, ...

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