Assume that the consumption schedule for a private open economy is such that consumption C = 20 + 0.80Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 40, G =20 and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig + G+ Xn.
a. Calculate the equilibrium level of income or real GDP for this economy.
b. What happens to equilibrium Y if G changes to 20? What does this outcome reveal about the size of the multiplier? What does this outcome reveal about the impact of fiscal policy?