[Equilibrium in the goods market] (20 marks)

Use the following information to answer the question(s)below.

C = 250 + 0.75YD I = 250

G = 200

T = 200 ( i.e. taxes are autonomous or exogenous)

where C=Consumption spending; YD=disposable income; I=investment spending; G= government spending; and T=taxes paid minus government transfers received by consumers. Remember that YD = Y T).

(a) (4 marks) Determine the equilibrium level of output and the equilibrium level of consumption for the above economy.

(b) (4 marks) Suppose that the government increased its expenditure by 20, what would the new equilibrium level of output be?

(c) (4 marks) Suppose that the government increased taxes by 40, what would the new equilibrium level of output be?

(d) (4 marks) Now suppose that the government was forced to keep a balanced budget so that G = T. What effect would a balanced-budget increase of government expenditure by 40 have on equilibrium output for this economy?

(e) (4 marks) Based on your results in part (d), what is the balanced budget multi- plier?