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Fredonia has the following consumption function:
C = 100 + 0.8DI
Firms in Fredonia always invest $700 and net exports are zero, initially. The government budget is balanced with spending and taxes both equal to $500.
a. Find the equilibrium level of GDP.
b. How much is saved? Is saving equal to investment?
c. Now suppose that an export-promotion drive succeeds in raising net exports to $100. Answer (a) and (b) under these new circumstances.
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