Q1 [70 points] Consider the following behavioral equations: Y = C+I+G C = Co + CYD YD-Y-T T=to+ti Y I bo bi Y-bai i=7 G is exogenously given and constant. Assume that ci, bi and ti are between 0 and 1, and that Co Autonomous consumption, i.e., consumer confidence C Marginal propensity of consume bo Autonomous investment, i.e., business confidence bi Marginal propensity of invest to Constant autonomous lump-sum tax t = tax rate, i.e., proportion of income tax a. Solve for equilibrium output. b. Show and illustrate the equilibrium level of output for this economy on a ZZ-Y graph (i.e., a graph that includes the ZZ line and 45-degree line with Z-demand- on the vertical axis, and Y on the horizontal axis), i. On the graph show the equilibrium level of output on the horizontal axis and the point the ZZ line crosses the vertical axis (i.e., y-intercept). ii. iii. Explain what variables determine the slope of the ZZ line, and what variables determine the value of the point ZZ lines hits the vertical axis? Explain why the slope of the ZZ line is important? c. What is the multiplier in this economy? What is the value of the autonomous spending? When the economy responds more to changes in autonomous spending? Explain. d. For the multiplier to be positive, what conditions must be satisfied? What would happen if they were not satisfied? Explain your answers. e. Using the result you obtained in (a) solve for equilibrium level of investment. What are the variables in your solution that have positive relationship with investment? What are the variables in your solution that have negative relationship with investment? Q2 [30 points] Suppose that you have decided to work extra two hours to earn $50 and purchase some Turkish food, which costs you $40, instead of cooking for two hours. a. Do you think GDP will increase due to this decision you have made? If so explain how much the GDP will increase and explain what approach you are using to measure the change in GDP. b. Do you think the effect of your decision on the measure of GDP is reflected accurately? Explain. c. Explain if it is possible that while nominal GDP increases, the real GDP to decreases in the same year.