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15 July, 18:11

You are given the following data concerning Freedonia, a legendary country: Consumption Function: C = 200 + 0.8Y Investment: I = 200 Aggregate Expenditure Function: AE = C + I Equilibrium: AE = Y Calculate the following: a. The level of equilibrium income, Y = nothing. (Enter your response as an integer.)

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  1. 15 July, 20:05
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    10,000

    Explanation:

    Let the following equations

    (1) C = 200 + 0.8Y

    (2) AE = C + I

    (3) I = 200

    In an open economy, equilibrium income equals the sum of aggregate expenditures: consumption + investment

    (4) In equilibrium: AE = Y

    So aggregating (2) and (4) we have: C + I = Y

    solve for Y:

    200 + 0.8Y = Y

    Then: 0.2Y = 200

    Y = 10.000

    The equilibrium income is 10,000
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