Consider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that the economy has the following consumption function, where C is consumption, Y is real GDP, I is investment, G is government purchases, and T is for net taxes: C = 25+0.75×(Y−T)
Suppose G = $130 billion, I = $60 billion, and T = $20 billion.
Given the consumption function and the fact that, in a closed economy, total expenditure can be calculated as Y=C+I+G, the equilibrium output level is
$
billion.
Suppose the government purchases are reduced by $50 billion. The new equilibrium level of output will be equal to
$
billion.
Based on the effect of the change in government purchases on equilibrium output, you can tell that this economy's spending multiplier is equal to .