Q.1 Assuming the economy is in an initial equilibrium at X, identify where the new equilibrium will be (AD curve shifts) if: (or if AS curve will also shift right or left?)

1. There is a rise in government spending_______________
2. There is a rise in government subsidies to the motor industry.___________
3. The government spends less on defence.____________________
4. The basic rate of income tax is raised._______________________
5. The wage rate rise by 20%._____________________________

Q.2 Suppose it was found that the MPC varied by income level in the following manner, with lower income households spending a greater portion of every dollar of income than higher income households.

a) Calculate the government spending and tax multipliers for each income bracket, considered separately.

MPC Income Spending Multiplier Tax Multiplier

0.9

0.8

0.75

0.6