Let us assume that the planned aggregate expenditure (AE) is the sum of all expenditure (less imports). In equation form that implies:
AE=C+I+G+X-M
where
C= total consumption expenditure
I= investment expenditure
G=government expenditure
X = export expenditure
M = import expenditure
where C= 1200 +0.95 DI
Note that Dl is disposable income. Disposable income was assumed to affect consumption, but we know that there is something else, controlled by
government, that can directly affect disposable income. That something is taxes. If we define disposable income as income after taxes, then we can write
an equation for DI.
DI=Y-T,
where Y is income (or GDP) and T represents total tax revenues.
Let's assume that T is autonomous as well (i.e. there are no income taxes) and that T = 1000 and also assume that investment, government spending.
exports and imports take on the following (autonomous) values:
1=2500
G=2000
X = 1500
M = 2500
All expenditures are measured in billions of dollars.
a) What is the equilibrium level of GDP in this economy?
b) If the government increases expenditure to $2500 billion, what is the new equilibrium level of GDP?
c) How much is the multiplier?