Demand Side Equilibrium & Multiplier

Consider an economy with the following characteristics (in $ billion):

C = 60 + 0.8Y_d (where Y_d = disposable income)

t = 0.2

I = 40

G = 50

X = 20

M = 10 + 0.14Y

(a)What is the aggregate expenditure function (AE)?

(b)Find the equilibrium GDP using algebra.

(c)Show the equilibrium GDP via an appropriate graph.

(d)Using the formula for the autonomous expenditure multiplier, compute the open economy multiplier for the above economy.

(e)Suppose that the government increases its purchases of goods and services by $20 billion. Calculate the new equilibrium GDP. Show this in your graph drawn in (c).