Consider a closed economy with the following expenditure function:

= + +

= 400 + 0.75( )

= 1200

= 800

= 1000

a.What is autonomous expenditure (E₀) for this economy?

b.According to the Keynesian Cross model of income determination, what would be the short run equilibrium value of real aggregate income (Y^*) for this economy?

c.All else equal, what would be the short run equilibrium value of income if government purchases (G) increased by 100 (i.e. - from 800 to 900)?

d.What is the government purchases multiplier (i.e.) for this economy?

e.All else equal, what would be the short run equilibrium value of income if government purchases remained at 800, but taxes (T ) are cut by 100 (i.e - from 1000 to 900)?

f.What is the tax multiplier (i.e.) for this economy?

g.According to the Keynesian Cross model, which is more effective at raising aggregate income in the short run, tax cuts or government spending? Why?