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Fact 11.5.1
An economy has a consumption function of C = 10 + 0.8Y, investment equal to 6, government expenditure equal to 10, exports equal to 10, and an import function of M = 0.1Y.
-Refer to Fact 11.5.1.What is equilibrium real GDP in this economy?
A)21
B)36
C)120
D)130
E)360

Question

Quizplus · Accepted Answer

Equilibrium in an economy occurs when aggregate demand equals aggregate output (Y), which is also the aggregate income. Aggregate demand (AD) is the sum of consumption (C), investment (I), government expenditure (G), exports (X), and imports (M) subtracted because it's an outflow. Using the given functions and values: AD = C + I + G + X - M = 10 + 0.8Y + 6 + 10 + 10 - 0.1Y. Simplifying, AD = 36 + 0.7Y. At equilibrium, AD = Y, so Y = 36 + 0.7Y. Solving for Y, we subtract 0.7Y from both sides to get 0.3Y = 36, and dividing both sides by 0.3 gives Y = 120.

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