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2. Algebra of the income-expenditure model Consider a small economy that is closed to trade, so...

2. Algebra of the income-expenditure model Consider a small economy that is closed to trade, so that its net exports are zero. Suppose that the economy has the following consumption function, where C is consumption, Y is income (real GDP), IP is planned investment, G is government purchases, and T is taxes: C = $45 billion+0.75×(Y – T) Suppose G=$60 billion, IP=$60 billion, and T=$20 billion. Given the consumption function and the fact that, in a closed economy, planned expenditure can be calculated as Y=C+IP+G , the equilibrium income level is $ billion. Suppose that government purchases are reduced by $50 billion. The new equilibrium level of income will be equal to $ billion. Based on the effect of the change in government purchases on equilibrium income, you can tell that this economy's multiplier is equal to A. 4 B.0.75 C. 1.5 D. 0.25

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