2. Consider the following economy: C =50 +.75( Y - T) T = 40 G = 50 I = 200 - 10r r = 10 X =0 IM = 0 C+I+G+ (X - IM) = Y Where C = consumption T = taxes Y = income (GDP) G = government spending I = investment r = the interest rate X = exports IM = imports Explain the "-10r" term in the investment demand equation. Calculate the equilibrium values of Y, C, I, and G. C. Suppose that the government decides to increase spending on roads by 10. Calculate the new equilibrium levels of Y, C, I, and G. What key assumption must we make about the relationship between output and potential output? What is the MPC? MPS? The government spending multiplier? e . Suppose G is back at its initial level (50). How much would the government have to lower taxes to achieve a similar increase in equilibrium Y? 3. Suppose the above country suddenly starts to trade with the rest of the world. Amend the above equations describing exports and imports as follows: X = 40 IM = .25Y What is the marginal propensity to import? Calculate the equilibrium level of GDP? Calculate equilibrium net exports (exports minus imports). Suppose through a "Buy American" advertising program we are able to double exports. Calculate the new equilibrium levels of GDP and net exports. e. What is the new spending multiplier?4. Consider an economy characterized by the following equations (where C is again consumption, etc.): C = 800 +.75(Y - T) T - 200 G = 300 1 = 340 - 30r X = 300 IM - .25Y C+1+G+ (X - IM) =Y Note that if you solve the above equations, you will get an expression with two unknowns. That is, you will not be able to determine Y and r simultaneously without more information. Here is some more information. Ms = 700 Md = 100 + .25Y - 50r Ms - Md Where Ms = money supply (assume that the central bank sets the money supply exactly) Md - money demand a. Why is the sign on Y in the money demand equation positive? Why is the sign on r negative? b. Solve for Y, r, and X-IM. c. Suppose that the money supply is reduced to 570. What is the new equilibrium Y? The new equilibrium