The next questions refer to the following simple Keynesian model.
Suppose C = 1000 + .9Y, G = 400, I = 100, (X - IM) = 0, and there are no income taxes.
-If investment falls by 50,equilibrium GDP will
A) fall by 50
B) fall by 5
C) fall by 500
D) fall by 45
E) fall by half its previous value

Question

Quizplus · Accepted Answer

In the simple Keynesian model, the equilibrium GDP is given by the equation Y = C + I + G + (X - IM). So, if I falls by 50, then the equilibrium GDP will fall by the same amount, as follows:

Y = C + I + G + (X - IM)
Y = (1000 + 0.9Y) + (100 - 50) + 400 + 0
Y = 1450 + 0.9Y
0.1Y = -500
Y = -500/0.1
Y = -5000

This implies that equilibrium GDP will fall by 500.

The Next Questions Refer to the Following Simple Keynesian Model