2. Now add the public sector as represented by gov't spending and taxes in columns 5 & 6 in table below.

(a) Write the equation representing snapshot of budget and Indicate the status of the budget as having a surplus or deficit, or balanced at Zero and explain why? How is this budget expected to affect the GDP? Explain!

(b) Use the lump-sum tax and the MPC to calculate the decrease in consumption due to this lump sum tax (show all your calculations); then use the change in consumption you just obtained to find the consumption after tax (c_a-fill in the column 7 below).

(c) Use the C_a to find the (after-tax) aggregate expenditures for the 4-sector private-public-open economy (AE_a) and fill in the column 8; Now use the column 1 and column 8 to find the new equilibrium GDP and DI in the 4-sector model.

(d) Has GDP increased in the 4-sector compared with those in the previous 3-sector equilibrium? If so, by how much? What is the effective multiplier from 3-sector to 4-sector and why? Explain.

(e) Has DI changed from 3-sector to 4-sector? Why/why not? How about consumption and savings? Explain your answer.

(f) Show the 3-sector and the 4-sector equilibrium on the same graph.

(g). use the Tax multiplier to calculate the change in GDP when there is a decrease of $50 in taxes?

15 pts.

(1)(2)(3)(4)(5)(6)(7)(8)

GDPCI_gX_nGTC_aAE_a (4-Sector)

1001203010100100

2002003010100100

3002803010100100

4003603010100100

5004403010100100

6005203010100100

7006003010100100

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