The equilibrium condition Y = C + I p + G + NX can be reinterpreted as

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The equilibrium condition Y = C + Ip + G + NX can be reinterpreted as follows. First, subtract C from both sides to get Y − C = Ip + G + NX. Then note that all income not spent on consumption goods is either taxed or saved, so that Y − C = S + T. Now combine the two equations to obtain S + T = Ip + G + NX. Construct a diagram with real GDP measured on the horizontal axis. Draw two lines, one for S + T and the other for Ip + G + NX. How would you interpret the point where the two lines cross? What would happen if investment spending increased?

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Macroeconomics Principles and Applications

ISBN: 978-1111822354

6th edition

Authors: Robert E. Hall, Marc Lieberman

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