Consider a simple economy in which whole investment is constant and equal to $50 billion

Economics Mar 02, 2021

Consider a simple economy in which whole investment is constant and equal to $50

billion. There are no government or foreign sectors, and the price level is constant. Assume that consumption behavior can be described as C = $40 billion + .8Y.

What is the equilibrium level of GDP in this model? Verify your answer by showing that savings equals investment in equilibrium (include a graph with your explanation please)

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Expert Solution

Computation of Equilibrium GDP in this Model:

Y = C+I is equilibrium

Y = 40+0.8Y+50

Y - 0.8Y= 90

0.2Y = 90

Y = 90/0.2

Y = $450 billion

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