Question

1.     Assume a closed economy and no government. Also assume consumption

               C=50-0.8Yd and investment I=80

a)     find the equilibrium output

b)     what is the implied multiplier

Answer 1

Calculating the equilibrium output

$Y = C +I$

$Y = 50- 0.8Y+ 80$

$(1+0.8)Y = 130$

$1.8Y = 130$

$Y = \frac{130}{1.8} = 72.222$

$Y = 72.222$

Calculating the multiplier

Multiplier $= \frac{1}{1- MPC}$

$MPC = 0.8$

Multiplier = $\frac{1}{0.2}= 5$