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?

5.Suppose that the following equations describe the 4-sector economy

Consumption function C= 60 + 0.8 Yd,

Investment function I= 100-5i,

% interest rate i=6 (use 6 to compute for the investment),

Government Expenditure G= 76,

Lump sum Tax Tx= 15,

Transfer payments TR=60,

Exports X=70

Imports M=20+0.2Y

5.1. Calculate the equilibrium level of income. At this level of income, is the economy operating with a budget surplus or budget deficit?

5.2. Calculate the investment, government, tax, transfer payments and foreign trade multiplier.

5.3. Suppose that government increases its education and health services by 65, what is the new level of income?

5.4. If exports increase by 10, what is the new level of income? Is the economy operating with a trade deficit or surplus at this level of income?

Fill-in questions.

Investment is defined as spending for additional (consumer, capital) (1)__________goods, and the total amount of investment in the economy depends on the expected rate of (interest, return)(2)__________ and the real rate of (interest, return)(3)__________. A business firm will increase the amount of investment if the expected rate of (interest, return)(4)__________on this investment is (greater, less)(5)________than the real (interest, return)(6)__________ it must pay for the use of money. At the equilibrium level of GDP or income, saving is (greater than, less than, equal to) (7)_______ investment. If aggregate expenditures are greater than the aggregate output, saving is (greater than, less than, equal to) (8)________ investment. If aggregate expenditures are less than the aggregate output, saving is (greater than, less than, equal to) (9)_________ and the aggregate output will (rise, fall) (10)_______. The multiplier is based on two facts: An initial increase in spending by business firms or consumers will increase the (debts, income) (11)__________ of households in the economy. This increase in (debts, income) (12)________ will increase and expand (consumption, investment) (13)________ spending of households by an amount equal to the income times the marginal propensity to (consume, save) (14)________. The size of the multiplier varies (directly, inversely) (15)________ with the marginal propensity to (save, consume) (16)__________