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1. Consider the following economy: C = [500 + 0.6 (Y - T)] 7, T = 0.2Y, I = = 20 0.05 G = G

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1. Consider the following economy: C = [500 + 0.6 (Y - T)] 7, T = 0.2Y, I = = 20 0.05 G = G and Y = C+I+G. Think of the new parameter y as a measure of consumer confidence. Consider the following three equilibra: Equilibrium Y Equilibrium 1 (e1) : 1.0 400 Equilibrium 2 (e2) : 0.9 400 Equilibrium 3 (e3) : 0.9 570 The other parameters and exogenous variables do not change across the three equilibria. The numerical solutions to the model in the three equi- libria are given in the table below: Equilibrium Endogenous Variables el 62 e3 Y 2500 2201 2500 1700 1401 1530 500 440 500 Question 1 continues on the next page ...Question I continued nm the last page Show the three equilibria in each of the following three diagrams. In each diagram. draw the relevant curvesI label them. label the three equi librium points and provide brief explanations. Your diagrams need not be drawn to scale but you should show the numerical equilibrium values of the variables measured on horizontal and vertical axes in all diagrams. (a) The consumptionfunction diagram with Y on horizontal axis and C on vertical axis. {ll} points) (b) The taxfunction diagram with 1" on horizontal axis and T on ver tical axis. [ll] points] [c] The demandoutput diagram with Y on horizontal axis and C+I+G on vertical axis. (l points)

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