Consider a small country that is dosed to trade so its net e

Consider a small country that is dosed to trade, so its net exports are equal to zero. Suppose the following equations describe the economy of this country in billions of dollars, where C is consumption, Y is real GOP, I is Investment, G is government purchases, and NT is net taxes. C = 25 + 0.75(Y - NT) 1=60 G-130 NT = 20 Solve for the level of aggregate output demanded by entering the appropriate numbers into the following equations. This economy\'s aggregate output demanded is Suppose the government decides to reduce purchases by $50 billion. After it does so, this economy\'s aggregate output demanded will equal , which is than it was before. Based on the effect of the change in government purchases on equilibrium output, you can tell that this economy\'s sample spending multiplier is equal to .

Solution

Y=C+I+G

Y=25+0.75(Y-NT)+60+130

Y=25+0.75(Y-20)+60+130

Y=25-15+60+130+0.75Y

0.25Y=200

Y=800

If G reduces by 50

Now G become 130-50=80

New Y=

Y=C+I+G

Y=25+0.75(Y-NT)+60+80

Y=25+0.75(Y-20)+60+80

Y=25-15+60+80+0.75Y

0.25Y=150

New Y=600 which is lower than before.

Multiplier=Change in Y/change in G

=800-600/50

=200/50=4