8. 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 T stands for net taxes:
C = 30 + 0.75 \times (Y - T)
Suppose G = $125 billion, I = $60 billion, and T = $20 billion.
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.
Suppose the government purchases are reduced by $100 billion. The new equilibrium level of output will be equal to ____.
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
____.
