2. Suppose that for a particular economy and period, investment was equal to 100, government expenditure was equal to 75, net taxes were fixed at 100, and consumption (C ) was given by the consumption function C=25+0.8YD where YD is disposable income and Y is GDP.

2.1. What is the level of the equilibrium level of income? (Y) Is the economy running with a trade deficit or trade surplus? How much?

2.2. What is the value of the government expenditure multiplier? Of the tax multiplier?

2.3. Suppose that investment declined by 40 units to a level of 60. What will be the new equilibrium level of income?

3. Suppose that initially equilibrium income was 200 units and that this was also the full employment level of income. Assume that the consumption function is C=25+0.80YD and that, from the initial equilibrium level of income, we have now investment decline of 8 units? What will be the new equilibrium level of income? What increase in government spending would be required to restore income to the initial level of 200? Alternatively, what reduction in tax collection would be sufficient to restore an income level of 200?

4. Suppose that the following equations describe the economy of the country of the Philippines.

C= 500 + 0.8 (Y - T), I= 200, G= 300, NX= 50, T= 200, Yf= 5000; where C=consumption level, I=investment, G=government expenditures, NX=net exports, T=taxes and Yf=full employment output/income. Use this information to find each of the following:

4.1. Investment, government and tax multiplier.

4.2. Equilibrium output/income.

4.3. The output gap.

4.4. By how much would government expenditures have to change to eliminate the output gap?