Consider the following model Y = C + I + G C = a + b(Y T) I = I r G = G T = T

a) Find the equilibrium level of Y, Y* (3 points)

b) Sketch the Keynesian Cross diagram for this model, clearly labelling the relevant slope, intercepts and the equilibrium level of Y (3 points)

c) Find the tax multiplier, investment multiplier, and fiscal expenditure multiplier (3 points)

d) Find BBM (Balanced Budget Multiplier). Is it equal to 1? Intepret it (3 points)

e) Suppose the government wants the new equilibrium of Y to increase by 200 (billions of Rs). Assuming b = 0.6, how much government expenditure has to increase to fulfill this objective? Denote the new equilibrium value of Y as Y2 and show this change in the graph in part b). What if b increases to 0.7? Explain your results (4 points)