Note: Hand written solution is not accepted. 8. The income-expenditure modelConsider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that the economy has the following consumptionfunction, where C is consumption, Y is real GDP, I is investment, G is government purchases, and T stands for net taxes:C = 40 +0.5x (Y-T)Suppose G = $265 billion, I = $50 billion, and T = $10 billion.$400 billionSuppose the government purchases are reduced by $100 billion. The new equ prium level of output will be equal to$500 billion$800 billionGiven the consumption function and the fact that for a closed economy total expenditure can be calculated as Y = $700 billion equilibrium outputlevel is equal to $billion.$600 billionBased on the effect of the change in government purchases on equilibrium output, you can tell that this economy's spending multiplier is equal to

The income expenditure model presumes that level of income is determined by the expenditure level. A…

onsider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that the economy has the following consumption nction, 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= $265 billion, I = $50 billion, and T = $10 billion. $400 billion $500 billion $800 billion Given the consumption function and the fact that for a closed economy total expenditure can be calculated as Y = $700 billion equilibrium output level is equal to billion.