Suppose the United States economy is represented by the following equations:

Z=C+I+G C = 1500 + .5YD I = 3000 G = 2000 T = 500 YD = Y - T

a. Given the above variables, calculate the equilibrium level of output.

Show the equilibrium level of output for this economy on a diagram with demand and output curves.

Now, assume that government spending decreases from 2000 to 1500. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy? Show the new equilibrium level of output for this economy on a diagram with demand and output curves.

Suppose the marginal propensity to consume increases from . to . . Given this information, show which of the following events will cause the largest increase in output?

2

i) G increases by 200

ii) T decreases by 250

iii) I increases by 150