1. Multiplier model.Suppose a closed economy is characterized by the following conditions:

AD = C+I+G

C=100+0.5(Y-T) [note this means c0=100, c1=0.5]

T=100

I=75

G=100

T is the amount of taxes collected.

Y-T describesthe disposable income of a household (income minus taxes).

Iisthe level of investment in the economy, G is the level of government spending.

Neither I, G, or T is dependent on income.

1. What is the equilibrium amount of output in this economy? Show your work.
2. What is the amount of disposable income at equilibrium? Show your work.
3. When the equilibrium amount of output is produced, what is the level of equilibrium consumption in the economy?
4. How would you characterize the government's budget in this economy?
5. Suppose the level of autonomous spending in the economy increases by 20 so thatc0=120.Give one possible reason why consumers may choose to do more autonomous spending.
6. Show on a graph (along with the45 degreeline) how the change in autonomous spending affects the Aggregate Demand (AD) curve.
7. After the level of autonomous spending increases, what is the new equilibrium value of output in the economy?
8. What is the relative magnitude of the change in autonomous consumption to the overall change in output?
9. What is the multiplier in this economy?
10. Suppose that increase in output in this economy causes banks to be more relaxed with lending and credit constraints become less severe. How will this affect the multiplier? Illustrate using a diagram.