The consumption function is C=40+(0.8)Y. Let G=20 and NX=0. By how much does equilibrium output (Y^e)...
The consumption function is C=40+(0.8)Y. Let G=20 and NX=0. By how much does equilibrium output (Y^e) decline when in investments (I) falls from 20 to 0?
Homework Answers
If I =20
AD= C+G+I+NX
Put AD= Y for finding equilibrium
Y= 40+0.8Y + 20+20
0.2Y= 80
Y = 400.
Now if I falls to 0,
Y = 40+0.8Y + 20
0.2Y = 60
Y = 300
So, equilibrium output falls by 400-300 = 100
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