1. Suppose that:
C = 500 + 0.8Y
I = 900
G = 800
There are no taxes, and there is no international trade.
A) Solve for the AE function and draw it on a graph with AE on the vertical axis and Y on the horizontal axis. Include a 45 degree reference line.
B) Solve for equilibrium GDP and label it on your graph.
C) Now suppose investment declines by 50, to 850. Draw the new AE curve, solve for the new equilibrium and label it.
D) Explain in words why equilibrium GDP changes in (C) by more than the change in investment.