In: Economics
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.
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