In a simple economy with no foreign sector, the following equations apply:
- Consumption function: C = 2,500 + 0.80 × (Y – T)
- Investment function: I = 500 + 0.30 × Y – 25 × r
- Government spending: G = 1,000
- Tax function: T = –250 + 0.30 × Y
where
Y = aggregate income
r = real interest rate in percent
If the real interest rate is 3% and government spending increases to 2,000, the increase in aggregate income will be closest to:
- 5,000.
- 7,143.
- 5,845.
i tried finding the answer in the section but couldnt
please help me out
You can use keyensian multipler which say if government spend 1 then the effect will be not 1 it will be more than 1.If increases spending by 2000 then the multiplier effect will be 7,143. Hence optionB
Refer this