Consider the following macro model of an economy 8 < : Y = C + I...

Consider the following macro model of an economy 8 < : Y = C + I + G0 C = 12 + 0:6Y I = 5 + 0:2Y

(i) Solve for the equilibrium GDP by any method you like.

(ii) Specify the government spending multiplier.

Solutions

Expert Solution

1. We know at equilibrium Y=AE=C+I+G

Thus Y=12+0.6Y+5+0.2Y

Y-0.8Y=17

Y=17/0.2=85

Thus equilibrium level of income=85

2. Govt sending multiplier is the change in income due to change in Govt expenditure=1/0.2=5

Govt expenditure multiplier=5

Rahul Sunny answered 2 years ago

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