2: Let the consumption function be C = 60 + 0:6(Y T) and the investment function be I = 500 40r Taxes are T1 = 100 and government expenditure is G1 = 100. a) What is the marginal propensity to consume? Is the government running a budget decit or a budget surplus? b) What is the equation for the IS line? Plot the IS line. c) Suppose that the government increases its spending from G1 = 100 to G2 = 200 (but leaves taxes unchanged T2 = T1 = 100). Find the equation for the new IS line and plot it on the same graph as part b. Which way does the IS line shift when government spending increases? d) Suppose instead that the government makes a budget neutralincrease in spending. This means that government spending is increased from G1 = 100 to G2 = 200 (as before), but now taxes are also increased by the same amount (from T1 = 100 to T2 = 200) to ensure the governments budget is not aected. Find the equation for the new IS line and plot it. Also plot the original IS line (from part b) on the same graph