Question 1

Consider a simple macro model with a constant price level and demand-determined output. We are given the following equations: C = 420 + 0.72Y, I = 200, G = 300, T = 0.2Y, X = 280, IM = 0.12Y. Calculate the following values: a) Calculate the simple multiplier (SM) in this economy. b) Suppose government expenditure suddenly decreases by $100 billion. Without determining the equilibrium level of national income, calculate the resulting change in equilibrium national income. c) Cutting government expenditure by $100 billion obviously improves the government's budget balance, but will the government's tax revenue remain the same amount? Calculate the overall change in the government's budget balance