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

The total expenditure schedule in Macroland begins with these initial levels (in billions of dollars): Income = 1,000; Consumption = 900; Investment = 200; Government = 300; Net Exports = −100. If the MPC = 0.75 and income increases in increments of 200, find the equilibrium level of income. If full employment requires an income level of 2,000, what (if anything) should the government do? Indicate both the direction of the spending change and the size of the spending change.

The levels of real disposable income and aggregate expenditures for an economy are given in the following table. -- Use the blue points (circle symbol) to plot the expenditures line for this economy on the following graph. Line segments will automatically connect the points. The black line represents the 45-degree line, where aggregate expenditures equal real GDP. Use the black point (plus symbol) to indicate equilibrium real GDP. - - In the previous graph, if the economy produces at an output level that is higher than equilibrium GDP, then the economy is in because aggregate expenditures are real GDP, and unplanned inventory investment is Read GDP (Y) Aggregate Expenditures (AE) (Trillions of dollars per year) (Trillions of dollars per year) 0 1 1 1.75 2 2.5 3 3.25 4 4 5 4.75 6 5.5 7 6.25 8 7 Use the blue points (circle symbol) to plot the expenditures line for this economy on the following graph. Line segments will automatically connect the points. The black line represents the…

5:06 A & & & P M Page 4 of 5 QUESTION 4 The figure below shows the planned Aggregate Expenditure function for a hypothetical economy (AEp = 1,000 + 0.5 * Y). In this economy, taxes and transfers are equal to zero, so YD =Y. What is the value of unplanned investment expenditure (Iµ) when GDP = 3,000? Suppose that, next period, autonomous consumption increased by 100 and every thing else remained the same. Under these new circumstances, what would the value of unplanned investment be when GDP = 3,000? 5,000 4, 500 4, 000 3, 500 3,000 AEp = 1,000 + 0.5*Y 2, 500 2000 1, 500 1,a00 500 500 1,000 1, 500 2,000 2 500 3,000 3,500 4,000 4,500 5,000 REAL GDP Page 5 of 5 QUESTION A5 a. Suppose that some kind of significant economic event has occurred, and you learn that the event will de finitely cause the aggregate price level to decrease, but that its effect on short-run equilibrium real GDP cannot be determined without knowing the exact PLANNED AGGREGATE EXPENDITURE