Grasping Reality on TypePad, by Brad DeLong

Consider an economy like the U.S., only with all planned spending categories in round numbers:

• I--business investment spending--$3 trillion/year
• G--government purchases--$3 trillion/year
• X--exports--$3 trillionyear
• C--consumption spending on domestically-producted commodities--C = c₀ + c_y(Y-T_

And suppose that the economy starts out in equilibrium with E = Y, with c₀ = 0 and c_y = 0.6:

1. What is the initial level of total planned expenditure E equals income and production Y?

2. Suppose c₀ = 0 rises to $3 trillion. After the economy attains its new equilibrium with E = Y, what is E = Y?

3. Suppose c_y = 0.6 falls to 0.4. After the economy attains its new equilibrium with E = Y, what is E = Y?

4. Return to c₀ = 0 and c_y = 0.6. Suppose that I rises from $3 trillion to $4 trillion. After the economy attains its new equilibrium with E = Y, what is E = Y?

1. Return to c₀ = 0 and c_y = 0.6. Suppose that G rises from $3 trillion to $3.5 trillion. After the economy attains its new equilibrium with E = Y, what is E = Y?

2. Return to c₀ = 0 and c_y = 0.6. Suppose that taxes T rise $3 trillion to $4 trillion. After the economy attains its new equilibrium with E = Y, what is E = Y?

3. Return to c₀ = 0 and c_y = 0.6. Suppose that exports X fall from $3 trillion to $2.5 trillion. After the economy attains its new equilibrium with E = Y, what is E = Y? "