Business, 12.03.2020 21:33 austinlogan3218

Consider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that the economy has the following consumption function, where C is consumption, Y is real GDP, I is investment, G is government purchases, and T stands for net taxes:
C = 40 + 0.5 * (y - t)

Suppose G = $115 billion, I = $50 billion, and T = $10 billion.

(a) Given the consumption function and the fact that for a closed economy total expenditure can be calculated as (y = C + I + G), the equilibrium output level is equal to billion.
(b) Suppose the government purchases are increased by $100 billion. The new equilibrium level of output will be equal to .
(c) Based on the effect of the change in government purchases on equilibrium output, you can tell that this economy's spending multiplier is equal to .

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Consider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that...