Consider the Kenyan economy to be described by the following information

1. Consumption function C = 100 + 0.8Yd
2. Planned investment 1 = 38
3. Government Purchases G=75
4. Exports of goods and services X = 25
5. Imports of goods and services M = 0.05 Yd
6. Disposable income Yd = Y-T
7. Net taxes T = 40
8. Planned aggregate expenditure AE = C+1+G+X-M
9. Definition of equilibrium income Y = AE

1. What is the equilibrium income (Y)? What is the budget deficit? What is the current account balance (X-M)? (8 marks)
2. Suppose the government increases its purchases to G=80. Explain using the government spending multiplier what happens to equilibrium national income (5 marks)
3. Suppose the government implements an expansionary fiscal policy in form of a tax cut from T=40 to T=30. Explain using the tax multiplier what the change in equilibrium national income will be. What happens to consumption spending (c) and imports (m)? (7 marks)