1. Find the Multiplier. An economy has a marginal propensity to consume (b) of 0.6 and a marginal propensity to import (m) of 0.2. What is the multiplier for government spending for this economy?

2. The Effects of Taxes and Spending. Suppose the economy has a marginal propensity to consume (b) of 0.6 and a marginal propensity to import (m) of 0.2. The government increases its spending by $2 billion and raises taxes by $1 billion. What happens to equilibrium income?

3. Savings and Taxes. When there are taxes, savings is defined as disposable income minus consumption, or S = (y – T) – C. In an economy with government but no foreign sector a closed economy equilibrium income is determined where output equals demand, or y = C + I + G. Show that we can also determine equilibrium income using the relationship S + T = I + G.

4. Working with a Model. An economy has the following dimensions:

C = 100 + 0.5(y – T)

I = 50

T = 20

G = 50

a. Draw the income-expenditure graph for this economy.

b. Find the equilibrium income and plot it on the graph.

c. What is the multiplier for government spending?

d. Find the savings function.

e. What is the level of savings when the economy is in equilibrium?

f. Show that at equilibrium S + T = I + G.