Let the Canadian economy be described below. You are an economist in the Department of Finance, Ottawa.

C = 55 + 0.9Y_d

(Y_dis disposable income)

I = 310

(Investment spending)

G = 140

(Government purchases)

NT = 0.1Y

(Net taxes)

X = 195

(Exports are constant)

IM = 0.31Y

(Imports depend positively on our own Y)

a)Calculate the equilibrium Y.

Find the autonomous multiplier.

Autonomous multiplier =

0

c)Find the government budget balance BB, given your Y in (a).

BB =

0

d)Oil prices have been rising recently. Higher crude oil prices translate to higher costs for gasoline, plastic and many products. Suppose the higher oil prices translate to our investment spending dropping from 310 to 110 due to a weaker investment confidence. Find the new Y.

Y =

0

e)Find the BB as a result of the drop in investment spending.

BB =

0

f)Is this change in BB due to an increase in government spending, i.e., is the Canadian government to be blamed?YesNo

g)Suppose the government wants to push the economy back to the Y level in (a) but with the investment spending still at I = 110. Find the new G necessary.

G =

0

h)Also find new BB with the government spending in (g) and the investment spending = 110.

BB =

0

i)Without further calculations, use the AD-AS diagram to demonstrate the effect of the government's action in (g). Be sure to include the initial drop in investment spending from (d) in your diagram.

Original Equilibrium (Point)