Question: In the aggregate expenditure model, assume that the consumption function is given by C = 800 + 0.8(Y - TP), that planned investment (I) equals

In the aggregate expenditure model, assume that the consumption function is given by C = 800 + 0.8(Y - TP), that planned investment (I) equals 200, and that government purchases (G) and taxes (TP) each equal 200. Assume that there is no import or export spending.

a. Calculate the equilibrium level of income.

b. If government purchases (G) increase by 100 (all else held constant), calculate the new equilibrium level of income and the value of the multiplier.

c. Compared with the original equilibrium, if both government expenditure (G) and taxes (TP) increase by 100, so that the government budget remains balanced, does the equilibrium level of income remain unchanged? Explain your answer

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