an economy where the various components of expenditure follow these equations: C = 10 + 0.8Yd I = 500 %3D G = 100 X = 300 M = 0.1Y T = 0.1Y A) Calculate the equilibrium level of GDP in this economy, highlighting what are the values of the Keynesian multiplier and the autonomous components of expenditure. Now assume that aggregate investment is also sensitive to movements of the interest rate: I = 500 – 2,000r %D The money supply is equal to 1,000 and money demand satisfies the following equation: Ma = 2Y – 8,000r B) Solve for the equilibrium levels of output and the interest rate. Explain why the equilibrium level of output is lower than the one obtained in (a). C) Suppose that the government increases the tax rate to 0.15. Calculate the equilibrium effects of this policy and provide an explanation with the help of appropriate diagrams. D) Now assume that the price level can adjust. Using appropriate diagrams, explain the short- run impact of the policy introduced in (v) on aggregate output and the price level and the mechanisms by which output will eventually return to its

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Consider an economy where the various components of expenditure follow these
equations:
C = 10 + 0.8Ya
I = 500
%3D
G = 100
X = 300
M = 0.1Y
T = 0.1Y
A) Calculate the equilibrium level of GDP in this economy, highlighting what are the
values of the Keynesian multiplier and the autonomous components of
expenditure.
Now assume that aggregate investment is also sensitive to movements of the interest
rate:
I = 500 – 2,000r
%3D
The
money supply is equal to 1,000 and money demand satisfies the following equation:
Ma = 2Y – 8,000r
B) Solve for the equilibrium levels of output and the interest rate. Explain why the
equilibrium level of output is lower than the one obtained in (a).
C) Suppose that the government increases the tax rate to 0.15. Calculate the
equilibrium effects of this policy and provide an explanation with the help of
appropriate diagrams.
D) Now assume that the price level can adjust. Using appropriate diagrams, explain
the short- run impact of the policy introduced in (v) on aggregate output and the
price level and the mechanisms by which output will eventually return to its
natural level.
Transcribed Image Text:Consider an economy where the various components of expenditure follow these equations: C = 10 + 0.8Ya I = 500 %3D G = 100 X = 300 M = 0.1Y T = 0.1Y A) Calculate the equilibrium level of GDP in this economy, highlighting what are the values of the Keynesian multiplier and the autonomous components of expenditure. Now assume that aggregate investment is also sensitive to movements of the interest rate: I = 500 – 2,000r %3D The money supply is equal to 1,000 and money demand satisfies the following equation: Ma = 2Y – 8,000r B) Solve for the equilibrium levels of output and the interest rate. Explain why the equilibrium level of output is lower than the one obtained in (a). C) Suppose that the government increases the tax rate to 0.15. Calculate the equilibrium effects of this policy and provide an explanation with the help of appropriate diagrams. D) Now assume that the price level can adjust. Using appropriate diagrams, explain the short- run impact of the policy introduced in (v) on aggregate output and the price level and the mechanisms by which output will eventually return to its natural level.
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