1.Let us say the estimated equation for the economy's aggregate demand is

Y = 400 - 15P + 8G

And the estimated equation for the economy's aggregate supply is

Y = 5 + 11P - 10W

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

a.If G = 160 and W = 100, find the equilibrium real GDP and the price level in the economy. (1)

b.What is the simple multiplier in this economy? Give the number and explain how you figured it out. (2)

c.What is the inflation rate due to the government increasing its purchases from G = 160 to G = 180 (expansionary fiscal policy), in %? (1)

d.What is the value of the multiplier when the price level varies? (3)

Imagine an economy in which the slope of the AD curve is equal to the (negative of) slope of the AS curve. If the simple multiplier is equal to 5, what is the value of the multiplier when the price level varies? Give the number and explain how you figured it out. (3)