All amounts are in billions of dollars per year. (The economy is "closed", meaning there are no exports or imports.)

C=1700+0.8YD

I=800

G=1100

TR=1000

TA=1500

a. Calculate again the value of equilibrium income in this economy. Show your work.

b. What is the value of the multiplier in this economy? Explain.

c. Suppose that the government recognizes that the current equilibrium is below the full employment equilibrium. In an effort to close the output gap the government decides to increase its expenditures (G) by $500 billion. How much will income change by? What will the new equilibrium income level as a result of the increase in government spending?

d. Now, suppose that instead of the policy described in part c., the government decides to cut taxes (TA) by $500 billion. How much will income change by? What will the new equilibrium income level as a result of the decrease in taxes?

e. Explain why the answers to part c. and d. differ, i.e., why in the Keynesian model of the economy, an increase in government spending (G) has a different effect on GDP and employment than an equal-sized decrease in taxes (TA). Now consider the case where this is an open economy. In addition to the above figures for C, I, G, TR, TA, consider the following figures regarding exports and imports:

EX=2000

IM=400+0.2Y

f. What is the value of equilibrium income in this economy? Show your work.

g. Explain why the spending multiplier would be smaller in this open economy than it would be without exports and imports.