Suppose the consumption expenditure is C = $100 billion + 0.9*Y. Investment (I) is $100 billion, government spending (G) is $50 billion and exports (X) are $100 billion. Imports depend on the level of income as follows: M = 0.1*Y.
a) Calculate the equilibrium level of income for this economy! What is the value of multiplier?
b) Suppose the marginal propensity to consume (MPC) decreases to 0.8. How would this affect the equilibrium in the economy?
c) What would be the effect on the multiplier if in addition to the change in b), the import function becomes M = 0.15*Y (i.e. people now spend a bigger share of their income on imports)?