Answer to Question #107698 in Macroeconomics for Rahul Nagpal

Question

C = 100 + 0.8Yd investment (I) = 200 govt. exp. (G) = 200 export = 1000 import function(M) = 20+0.3Y. Calculate value of multiplier.

Answer 1

The government spending multiplier is 1/(1-0.8) = 5, which means that for every $1 increase in government spending, the equilibrium level of output increases by $5.