Suppose that the MPC is 0.8, while the sum of planned investment, government purchases, and net exports is $500 billion. Suppose also that government budget is in balance.
a.What is the sum of saving and net taxes when desired spending equals real GDP? Explain.
b.What is the value of the multiplier?
c.Explain why the multiplier is related to the slope of the consumption function.
a) FromY = C + I + G + EX - IM
<br>We know Y = 0.8Y+500,
<br>then Y = 2500, and C=0.8Y=0.8*2500=2000
<br>since desired spending equals ...
Explain why the multiplier is related to the slope of the consumption function.