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 |
Y: Aggregate income r: Real interest rate |
If the real interest rate is 3% and government spending increases to 2,000, the increase in aggregate income will be closest to:
C is correct.