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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.If autonomous consumption increases by 10, what is the new equilibrium real GDP for this economy?
A)86.67
B)460
C)120
D)153.33
E)230

Question

Quizplus · Accepted Answer

The original equilibrium real GDP can be found by setting Y = AD:
Y = C + I + G + NX
Y = (10 + 0.8Y) + 6 + 10 + (10 - 0.1Y)
Y = 36 + 0.7Y
0.3Y = 36
Y = 120

With an increase in autonomous consumption of 10, the new consumption function becomes:
C = 20 + 0.8Y

The new equilibrium real GDP can be found by setting Y = AD:
Y = C + I + G + NX
Y = (20 + 0.8Y) + 6 + 10 + (10 - 0.1Y)
Y = 46 + 0.7Y
0.3Y = 46
Y = 153.33

Therefore, the new equilibrium real GDP for this economy is 153.33.

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