1. Consider the following closed economy model. Y = AE in equilibrium AE = C + I + G C = Ca + b YD 0 < b < 1 YD = Y - T T = Ta + t Y Ta > 0, 0 < t < 1 I = Ia G = where is constant (a) Solve for the equilibrium level of Y, Y*. (b) Obtain the government expenditure multiplier, dY/dG. (c) Obtain the lump sum tax multiplier, dY/dTa. (d) Suppose that G and Ta are simultaneously increased by the same amount. This change would have no initial effect on the government deficit. What would be the effect on output

2. Take the model in question (1) and modify the investment function. Let's suppose that firms do care about the government's deficit, and that a deficit destroys confidence, which reduces investment. Suppose the new investment function is: I = Ia - v (G - T) where v > 0 (a) Solve for the equilibrium level of Y, Y*. (b) Obtain the government expenditure multiplier, dY/dG. (c) Obtain the lump sum tax multiplier, dY/dTa. (d) Suppose that G and Ta are simultaneously increased by the same amount. This change would have no initial effect on the government deficit. What would be the effect on output?