- Assume an economy described by the following equations:

E º C + I + G

C = 250 + 0.4Yd

Yd = Y – T

T = 50

I = 150 + 0.2 Y

XN = 200 – 0.1 Y

G = 100

- Compute the government surplus or deficit.
- Compute the equilibrium income produced by this economic system.
- Compute the trade balance in equilibrium.
- Check the condition according which in equilibrium the investment must be equal to the level of aggregate saving.
- Compute tax and government expenditure multipliers. Explain the concept of multiplier.
- What is the effect of an increase in the propensity to consume.?In answering to the following questions let’s always consider as starting equilibrium income that computed in point b.
- Compute the change in the equilibrium income due to an increase in taxes of 50.
- Compute the change in the equilibrium income due to a decrease in government expenditure of 50.
- Compute the change in the equilibrium income if the policies described in point f and g are simultaneous .
- Compute the change in equilibrium income due to an increase in world demand of 100
- Using an IS-LM model, describe graphically the effects of a restrictive fiscal policy. Explain the effect of this policy on the interest rate. Why the interest rate change?
- How can the central bank (graphically) mitigate the effect on the GDP of the above described policy?
- Using an IS-LM model, describe graphically the effects of simultaneous restrictive fiscal and monetary policies.
- Show graphically the effect of an income increase in the money market.
- Derive the IS relation.