Suppose that the initial output equilibrium was 200 units As

Suppose that the initial output equilibrium was 200 units. Assume the consumption function is C=25+0.8Y_D

_{Suppose there is now a decline in investment of 8 units. What will be the new equilibrium level of income? I know the answer is 160, but I\'m not sure how to get there.}

Solution

Equilibrium level of Income Y =  C + I + G

where C is the consumption, I is the income and G is the government expenditure.

Consumption is given by C=25+0.8YD

Therefore Y = (25+0.8YD) + I +G

The new equilibrium level of income is given by 0.8* 200 = 160.

Therefore with the decrease in investment the new level of equilibrium income will be 160.