Suppose that the economy is characterized by the following behavioral equations:

C =1000+0.75YD

I = 500+0.25Y

G = 900

T =100+0.2Y

Solve for

a.Compute total demand at equilibrium.

b.Assume that G is now equal to 1200. Solve for equilibrium output.

c. Compute total demand. Is it equal to production? Explain.

d.Assume that G is equal to 1200, so output is given by your answer to (b). Compute private plus public saving. Is it equal to investment? Is it higher or lower than when G was 900? Explain.

e. What is the multiplier? What happens to the multiplier if tax revenue (T) is instead fixed at 3000? Explain.