1.Suppose the government raises its revenue by a net tax of 25 percent on income, t = 0.25. Further suppose that induced expenditure is 0.45Y (based on c = 0.8, t = 0.25 and m = 0.15). (a) What is the slope of the AE function? What is the size of the multiplier? (b) Autonomous expenditure by the non-government sectors (A0) is 300 and government expenditure is 400. What is the equilibrium income and output? What is the government's budget balance? (c) Now assume the government increases its expenditures by 100 to provide additional funding for national defense. What is the effect on equilibrium income and output? What is the effect on the government's budget balance?

2. An economy is in equilibrium at a real GDP of 750, but current estimates put potential output at YP = 850. (a) Is there an inflationary or a recessionary gap, and, if there is either, what is its size? (b) Research suggests that induced expenditure is 0.5Y (based on c = 0.75, m = 0.10, and t = 0.20). If there is a gap, what change in government expenditure would eliminate the gap? (c) If the government preferred to change its net tax rate to eliminate the gap, and not change government expenditure, what new tax rate would be required to eliminate the gapp