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2. Suppose the economy in Macroland is represented by the following data:

C=100+0.5Yd, T=2000, G=2000, I=200

(a) Calculate the equilibrium level of output. Graph your solution.

(b) If the government spending increases by 100 what is the new equilibrium level of output? Use the government spending multiplier.

(c) If the government increases taxes by 100 what is the new equilibrium level of output? Use the tax multiplier.

(d) If the government increases taxes and spending by 100 what is the new equilibrium level of output?

(e) Calculate the equilibrium level of output in case where taxes depend on income according to the following: T=-50+0.25Y.

3. (a) For each of the following scenarios briefly describe the policy mix that would result in each of the following situations:

(i) The interest rate decreases, investment increases, and the change in aggregate output is indeterminate.

(ii) Aggregate output increases and the interest rate is indeterminate.

(iii) The interest rate increases, investment decreases, and the change in aggregate output is indeterminate.

expansionary fiscal policy and contractionary monetary policy.

(iv) Aggregate output decreases and the interest rate change is indeterminate.

(b) For each of the following scenarios briefly explain what is the effect on the aggregate demand curve:

AD is comprised of C, I,G and NX. If any one component is affected AD is affected.

(i) The Fed lowers the discount rate

(ii) The price level decreases.

(iii) The federal government increases federal income tax rates

(iv) Pessimistic firms decrease investment spending

(v) The inflation rate falls by 3 percent

(vi) The federal government increases purchases to stimulate the economy.

4. (a) Suppose the Federal Reserve Bank is pursuing a contractionary monetary policy. Using a graphical analysis, show the effects of this policy on the equilibrium interest rate, investment and output. Make sure you clearly label all the curves in your graphs and the initial and final equilibria.

(b) Suppose the Federal Government is pursuing a contractionary fiscal policy. Using a graphical analysis, show the effects of this policy on the equilibrium interest rate, investment and output. Make sure you clearly label all the curves in your graphs and the initial and final equilibria. Is there any crowding-out due to the contractionary fiscal policy?