1.Let the AD and AS be as follows:

AD: Y = 700 - 15P + 10G

AS: Y = 10 + 12P - 10W

where Y is the real GDP, P is the price level (GDP deflator), G is government purchases, and W is the index of wages.

a.If G = 200 and W = 100, find the equilibrium real GDP and price level in the economy. (1)

b.What is the simple multiplier in this economy? (2)

c.If the government increases its purchases to G = 220, what are the new equilibrium real GDP and price level in the economy? (1)

d.What is the inflation rate due to the expansionary fiscal policy (increasing the government purchases from G = 200 to G = 220), in %? (1)

e.What is the multiplier in this economy when the price level varies? (2)

(round all your numerical answer to 3 decimals)

2.With the AD-AS diagram, show how the multiplier when the price level varies depends on the shape of the AS curve. (3)