Question 1 [11 points]

Suppose the government raises its revenue by a net tax of 40 percent on income, t = 0.4. The marginal propensity to consume out of disposable income is 0.9 and the marginal propensity to import is 0.2.

Note:Keep as much precision as possible during your calculations. Your final answer should be accurate to at least two decimal places.

a)What is the slope of the AE function? What is the size of the multiplier?

Slope of AE

=

0

Multiplier

=

0

b)Autonomous expenditure by the household and business sectors (C + I) is 300, government expenditure is 400, exports are 90 and imports are 60. What is the autonomous expenditure and equilibrium output? What is the government's budget balance?

Autonomous Expenditure

=

Equilibrium Real GDP

=

Government Budget Balance

=

c)The government increases its expenditures by 130 to provide additional funding for national defense. What is the effect on equilibrium income and output? What is the effect on the net tax revenue?

Equilbrium income( increases or decreases)

by______

and the net tax revenue

(Increases or decreases)

by

.

d)What is the government's new budget balance?

Government New Budget Balance

=