Question:
Consider an economy in which investment (I) equals 400, government purchases (G) equals 800, taxes (T) equal 600, exports (X) equals 200, and imports (M) equal 250. The consumption function is:
C = 100 + 0.8(Y-T)
What is equilibrium GDP? What will equilibrium GDP equal if government expenditures increase 200? What will equilibrium GDP equal if taxes decrease 200? Why are the results different?