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

C=

=30+0.75(Y-T)

30+0.75(Y-T)Suppose G = $25 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 asY=C+I+G

Y=C+I+G, the equilibrium output level is equal tobillion.

Suppose the government purchases are increased 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 .