An economy is described by the following equations:

(LO7)

a. What is aggregate expenditure when Y = 600.

b. Consumers and businesses alike become more pessimistic about the future and reduce their expenditures by 10 each. Immediately following this change, what is aggregate expenditure if Y is still 600? (In other words, what is the initial change in aggregate expenditure?)

c. What would you expect firms do in response to this change in expenditure, how will firms’ response affect aggregate income, and how will households respond?

d. By how much should government purchases change in order to offset the initial drops and avoid a recession?

e. By how much more would government purchases have to change if the multiplier effect were allowed to take effect?
If the government instead decides to change taxes, determine if taxes would need to change by more, less, or the same as the answer in part d.

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C 40+ 0.8(Y - T) I = 70 G = 120 NX = 10 T = 150