Consider an economy characterized by the following equations
AD: Y = 40 - 2P
AS: Y = 10 + P
where Y is national income, AE is desired aggregate expenditure, P is the price level, AS is the aggregate supply. National income is in billions of dollars.
Solve for macroeconomic equilibrium Price and Output. Illustrate the equilibrium in a diagram with P on the vertical axis and Y on the horizontal axis.
Now suppose, all else equal, exports increase by $1.5 billion. Changes the AD to Y = 46 - 2P
Solve for the new equilibrium P and Y.
What is the multiplier for this economy when prices are allowed to change?