Question

In a closed economy with no government, the consumption function is modeled by
C = 500 + 0.65Y. If investment falls by $200m, what is the change in national Y.

Answer 1

If the consumption function is modeled by C = 500 + 0.65Y, then the money multiplier is:

$m = \frac{1} {1 - 0.65} = 2.86.$

If investment falls by $200m, then the national income Y will decrease by $200×2.86 =$ $5.72m.