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C = 100 + 0.75*Y d Consumption Function I = 200Investment G = 300Government Spending X = 200Exports IM = 50 + 0.25*Y d Imports

C = 100 + 0.75*YdConsumption Function

I = 200Investment

G = 300Government Spending

X = 200Exports

IM = 50 + 0.25*YdImports

Yd = Y - TDisposable Income

T = 100Taxes

1.How much does the government borrow or lend?

2.What is the current account surplus/deficit when the economy is in equilibrium?

3.Where does funding for government come from assuming governments borrow from domestic savers first?

4.Suppose taxes increase to 300. What is the new equilibrium level of income?

5.What is the new level of household savings in the new equilibrium?

6.What happens to I -S in the new equilibrium?

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