AD = C +I + G C = $200 + 0.8YD G = $1,200 I = $500 - 40i

TA = 0.375Y TR = $125 YD = Y - TA + TR

Ms/P = $7,000 and L = Md = 2Y - 40i

The GE solution for the above from your last homework was:

IS Curve: Y = $4,000 - 80i

LM Curve: Y = 3500 + 20i

i= 5% and Y = $3,600

1)If Government spending increases from $1,200 to $1,450 (a change in A = $250), find the new General Equilibrium solution for (i,Y). [3 points]

2)Based on the original GE values above (5%, $3,600) and the new values from Expansionary Fiscal Policy (EFP) in #1, calculate the Crowding-Out impact.

3)Now assume the Fed uses EMP to increase the Money Supply (Ms) from $7000 to $8000 when Government increases Spending from $1,200 to $1,450. Find the GE values for (i,Y).

4). Did Crowding-Out occur (justify your answer with calculations)?