(a) Calculate the equilibrium output for the economy.

(b) Calculate the output gap in the economy.

(c) Suppose that the government reduces unemployment benefits which leads to a decrease in z from 0.02 to 0.01. The decrease in unemployment benefits also leads to a decrease in autonomous consumption from 100 to 90 in period t, in this economy. Calculate the effect on the output gap and inflation after these changes. Show your work clearly. 1

(d) Explain the impact on inflation intuitively.

e) Show the effects graphically using the IS-LM-PC model.

(f) If the Central Bank wants to try and close the output gap, how should they change the real interest rate in the economy? Show the effect graphically and explain briefly. You do not need to show calculations for this part.

(g) Suppose that the government decides to increase the tax rate from t = 0.1 to t = 0.2. Calculate the effect on the spending multiplier in the economy. Show your work. Also, explain the effect intuitively

Question 1 Consider an economy in which the following relationships hold at time t: Consumption Function: 0,: = 100 + .25(Y; 1}) Tax: Ti = m where t is the tax rate and t = 0.1 Investment Spending: It = 200 + .25Y; 1000?": Government Spending: Gt = 250 Nominal Interest Rate: it = 0.05 Wage Setting W} = Pf(1 out + z), where a = 0.6, 2 = 0.02 Price Setting H = (1 + 0.01)I/Vt Labor Force: L = 1100 Production Function: Y = AN Expectation Formation: 1r: = 7'r = 0.03 Suppose that productivity A is constant and can be normalized to 1