Question: C = consumption, Ip = investment spending (as a function of price level), G = government spending, Tx = tax revenue, Yd = after-tax income,

C = consumption, Ip = investment spending (as a function of price level), G = government

spending, Tx = tax revenue, Yd = after-tax income, Assume for a given closed economy:

C=100 + 0.9 Yd - 20P

Ip= 400 - 40P

G=300

T=100

Moreover, aggregate supply curve for this economy is defined by the following equation:

P=1.41 + 0.0001Y

a. According to the investment equation (Ip= 400 - 40P) as overall price level in

the economy increases investment spending decreases. How could you explain this

situation? Please use graphs to elaborate your answer.

b. Find the equilibrium level of overall price and aggregate output in this

economy. What would be the value of consumption and investment spending at this

equilibrium?

c. How would the equilibrium aggregate output and price level change if

government spending increases to Gnew=400? What would be the value of consumption

and investment spending at this new equilibrium?

d. Compare equilibrium values of investment spending and consumption you find

in parts (c) and (d). How would you explain the changes? Elaborate your answer for both

investment and consumption.

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