8. The income-expenditure model Consider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that the economy has the following consumption function, where C is consumption, Y is real GDP, I is investment, G is government purchases, and T stands for net taxes: C = 40 + 0.75 X (Y -T) ted Suppose G = $115 billion, I = $60 billion, and T = $20 billion. Given the consumption function and the fact that for a closed economy total expenditure can be calculated as Y = C + / + G, the equilibrium output level is equal to $2607 billion. Suppose the government purchases are reduced by $50 billion. The new equilibrium level of output will be equal to Based on the effect of the change in government purchases on equilibrium output, you can tell that this economy's spending multiplier is equal to Grade It Now Save & Continue