STUDY QUESTION IS ON AGGREGATE SUPPLY AND DEMAND.

MULTIPLIER EFFECT ASSUMPTION:

1.Suppose C=200+45(YT) where C = Consumption; Y=GDP and T=total taxes = 250; G=250 and I=250 and NX=0

a. Solve for the consumption function.

b. Solve for the income-expenditure equilibrium.

c. Suppose G increases to 350, what is the multiplier? (Solve for new equilibrium and find multiplier; check your work by using spending multiplier formula.) How does this affect the aggregate demand curve?

d. Suppose T decreases to 150, what is the multiplier? (Solve for new equilibrium and find multiplier; check your work by using tax multiplier formula, use the original data, i.e., G=250). How does this affect the aggregate demand curve?