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Ivyland has the consumption function, C = 50 + 0.8(Y – T). Firms in Ivyland always invest 350 and net exports are initially zero. The government budget is balanced with spending and taxes both equal to 250.
a. Find the equilibrium level of GDP.
b. Derive the expenditure multiplier.
c. How much is saved in this economy? Is saving equal to investment?
d. New, suppose that an export promotion drive succeeds in raising net exports to 50. Answer parts a, b, and c again under these circumstances.