1.Imagine that you have estimated the following equations for alaisses-faire autarky(a closed economy with no government):

C= 2,800 + 0.95Y

I= 900

whereCis desired consumption,Yis national income, andIis desired investment.

a.Write down the desired aggregate consumptionAEfunction.(1)

b.Applying the equilibrium conditionAE=Y, find out the equilibrium national income.(1)

c.In the equilibrium (part b above), calculate national saving.(1)

2.Consider the following economy for which the parameters have been estimated:

The desired consumptionC= 600 + 0.8Y_D;

The gross investmentI= 200;

The taxes areT= 0.2Y;

The government purchasesG= 500;

The imports areIM= 0.3Y;

The exports areX= 650.

a.Calculate the marginal propensity to spend.(1)

b.Calculate the simple multiplier (with government & foreign trade).(1)

c.Find the equilibrium national income (demand determined).(1)

3.Consider the following economy (E) for which the parameters have been estimated:

The desired consumptionC= 500 + 0.8Y_D;

The gross investmentI= 200;

The taxes areT= 0.2Y;

The government purchasesG= 500;

The imports areIM= 0.14Y;

The exports areX= 300.

a.Find the equilibrium national income (demand determined).(1)

b.Now imagine that the exports have dropped fromX= 300 toX= 200 (because there is recession experienced by E's largest trading partner). The E's government wants to avoid a recession, and they want to do it by cutting the taxes. What level would have to cut the tax ratetto in order to restore E's equilibrium national income (demand determined) to the level they had before the decrease in their exports (one that you have found in part (a) above)? Get the number and show your work.(3)