Given: Suppose the United States economy is represented by the following equations:

AE = C + I + G C = 500 + .5YDT = 600 I = 300

YD= Y - T G = 2000

a. Given the above variables, calculate the equilibrium level of output. [Hint: First specify (using the above numbers) the aggregate expenditure equation (AE) for this economy. Second, using the equilibrium condition, equate this expression with Y. Once you have done this, solve for the equilibrium level of output.]

b. Now, assume that consumer confidence decreases causing a reduction in autonomous consumption (c0) from 500 to 400. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?

c. Briefly explain why this reduction in output is greater than (in absolute terms) the initial reduction in autonomous consumption.