1.Say, you have estimated the following equations for a laisses-faire autarky:

C = 3,700 + 0.95Y

I = 1,100

where C is desired consumption, Y is national income, and I is desired investment.

a.Write down the desired aggregate consumption AE function.

b.Find out the equilibrium demand-determined national income.

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

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

The desired consumption C = 800 + 0.84Y_D;

The gross investment I = 250;

The taxes are T = 0.22Y;

The government purchases G = 820;

The imports are IM = 0.31Y;

The exports are X = 750.

a.Calculate the marginal propensity to spend.

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

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

d.What is the budget balance in the equilibrium national income (demand determined)? Give the number. Is there a budget deficit, surplus, or do we have a balanced budget?

e.If the government had increased its purchases to G = 950, other things being equal, what would be the new equilibrium national income (demand determined)?

f.The economists have estimated the potential GDP at Y* = 4,500. If the government wanted the equilibrium demand-determined national income be equal to the potential GDP, how much would the government have to spend on its purchases of goods and services? Show your work.