Consider a small open economy described by the following equations:

Y = C + I + G + X - M

C = 150 + 0.8(Y-T)

I = 300

G = 150

X = 70

M = 0.2Y

T = 50 + tY

where Y is GDP, C is consumption, I is investment, G is government expenditures, X is exports, M is imports, T is taxes, and t is the tax rate on income. If the economy were at its natural level of output (i.e., full employment), GDP would be 1000.

Y = C + I + G + (X - M)

1000 = (150 + 0.8(1000 - (50 + t * 1000)) + 300 + 150 + 70 - 0.2(1000)

1000 = 150 + 0.8(1000 - 50 - 1000t) + 300 + 150 - 130

1000 = 470 + 0.8(950 - 1000t)

1000 = 470 + 760 - 800t

800t = 1230 -1000

t = 230/800

t = 0.2875 or 28.75%

What is the marginal propensity to consume and the expenditure multiplier in this economy? Show your work. (5 marks)