5. Algebra of the income-expenditure model 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 7 is for net taxes: C 40+0.5x (Y-T) Suppose G $265 billion, / $50 billion, and 7 $10 billion. Given the consumption function and the fact that, in a closed economy, total expenditure can be calculated as Y = C+I+G, the equilibrium output level is s billion. Suppose the government purchases are reduced by $100 billion. The new equilibrium level of output will be equal to s billion. 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
5. Algebra of the income-expenditure model 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 7 is for net taxes: C 40+0.5x (Y-T) Suppose G $265 billion, / $50 billion, and 7 $10 billion. Given the consumption function and the fact that, in a closed economy, total expenditure can be calculated as Y = C+I+G, the equilibrium output level is s billion. Suppose the government purchases are reduced by $100 billion. The new equilibrium level of output will be equal to s billion. 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
Chapter11: Fiscal Policy
Section: Chapter Questions
Problem 1.4P
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![5. Algebra of the income-expenditure model
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, / is investment, G is government purchases, and T is for net taxes:
C 40+0.5x (Y-T)
Suppose G $265 billion, 7- $50 billion, and T $10 billion.
Given the consumption function and the fact that, in a closed economy, total expenditure can be calculated as Y = C+I+G, the equilibrium output
level is s
billion.
Suppose the government purchases are reduced by $100 billion. The new equilibrium level of output will be equal to s
billion.
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](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7d69c768-6f8b-471f-a0e4-2f4d639ca57d%2F0c17fb53-f71f-4c8d-94b4-0d592d7eac2b%2F0exm7mb_processed.jpeg&w=3840&q=75)
Transcribed Image Text:5. Algebra of the income-expenditure model
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, / is investment, G is government purchases, and T is for net taxes:
C 40+0.5x (Y-T)
Suppose G $265 billion, 7- $50 billion, and T $10 billion.
Given the consumption function and the fact that, in a closed economy, total expenditure can be calculated as Y = C+I+G, the equilibrium output
level is s
billion.
Suppose the government purchases are reduced by $100 billion. The new equilibrium level of output will be equal to s
billion.
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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