Please answer all questions a - d

2. Consider a small open economy described by the following equations: Y = C+I+G+X-M C = 150 + 0.8(Y-T) I = 300 G = 150 X= 70 M= 0.2Y T = 50 +tX where Y is GDP, C is consumption, I is investment, G is government expenditures, X is exports, M is imports, T is taxes, and t is the tax rate on income. If the economy were at its natural level of sutput (i.e., full employment), GDP would be 1000. (Total marks = 20) a) What is the tax rate (t) in this economy? Show how you arrived at the answer. (5 marks) b) What is the marginal propensity to consume and the expenditure multiplier in this economy? Show your work. (5 marks) c) Suppose the government fixes the tax rate (t) at 35% (i.e., at 0.35), and solve for GDP. How does it compare to the natural level of output? Show your work. (5 marks) d) Suppose the government wants to offset the change in the level of GDP caused by the change in the tax rate in (c). By how much should government expenditures change to return GDP to its natural level? Show your work