1. Assuming a closed economy, use the information below to answer the following questions: C = 100 + 0.8YD 7 = 150 G = 300 TR = 100 t = 0.2 a) Calculate the equilibrium level of income and the multiplier in this model b) Calculate the budget surplus at the equilibrium income. c) Suppose the Congress decides to reduce transfer payments (such as grants) and increase government expenditure by an equal amount, such that ATR = -50 and AG = 50. Would the equilibrium income rise or fall? By how much? d) Suppose the marginal propensity to consume (MPC) increases to 0.9, what is the new level of equilibrium income. Will the budget surplus increase or decrease? Why? 2. Why might the budget deficit be a bad measure of the direction of fiscal policy? 3. Explain why proportional income taxes and welfare systems (transfer payments) are considered automatic stabilizers. Use an example in your explanation. 4. What determines the slope of the IS curve? Will it be steeper or flatter in the presence of a proportional income tax? 5. What determines the slope of the LM curve? 6. Explain how and why the multiplier, OG, and the interest sensitivity of aggregate demand affect the slope of the IS curve