1. (30 Points) Imagine an economy where general price level is constant, there is no government, and the economy does not trade with foreign economies. Further, assume the following desired consumption and investment functions: C = 500 + 0.9Y , I = 100

(a) (6 Points) Derive the aggregate expenditure function for the economy. What are the autonomous expenditure and marginal propensity to spend? (b) (4 Points) Find the equilibrium level of national output/income in this equilibrium, and denote it by Y0.

(c) (4 Points) Assume that in an economy like this, national income is suddenly lowered by $1000. Denote this level of national income by Y1. What is the desired aggregate expenditure at this level of income? Call it AE1.

(d) (6 Points) Draw the AE function against Y . Show E0, Y0, Y1, and AE1 on your diagram.

(e) (6 Points) Do firms increase or decrease output when national income is equal to Y1? By how much? Denote the new level of output by Y2. [Hint: do not go beyond the first step of output change.]

(f) (4 Points) Is the economy in equilibrium when national income is equal to Y2? Explain why or why not.