The following are the equations that make up a closed economy. The variable names are those familiar to you from the course.

C ^d = 50 + 0.5(Y-T ) -250r

I ^d=20-150r

M=P [20+0.5(Y-T )-400r]

Y=C ^d+I ^d+ G

Start by using the above equations to derive the aggregate demand function for this economy with Y on the left-hand side. Which of the following represents your AD curve:

Question 34 options:

	Y=90+G - 0.5T+M/P
	Y =50+G -T+M/P
	Y=50+G+M/P
	Y= 50 - 0.5T+M/P

Suppose that G= 10, the budget is balanced and M/P= 40. Which of the following would be the level of GDP (Y) and the real rate of interest (r):

Question 35 options:

	Y=85; r=0.04375 or 4.375%
	Y=135; r=0.1065 or 10.65%
	Y=90; r=0.05 or 5%
	Y=100; r = 0.0625 or 6.25%

Suppose that Gincreases to 15, the level of taxation remains at 10 and M/P=40. Which of the following would be the level of GDP (Y ) and the real rate of interest (r):

Question 36 options:

	Y=95; r=0.05625 or 5.625%
	Y=140; r=0.1125 or 11.25%
	Y=85; r=0.04375 or 4.375%
	Y=105; r = 0.06875 or 6.875%

Based on your model for the AD demand curve, describe what would be the effect on GDP(Y ) of an increase in taxes and explain why:

Question 37 options:

	GDP would fall by more than the increase in taxes because of the multiplier effect
	GDP would fall by half the amount of the tax due to a decline in consumption
	GDP would fall by the same amount as the increase in taxes since consumption would fall
	There would be no effect. The tax increase would shift both the IS and LM curves down by the same amount

Suppose that taxes rose from 10 to 15. Which of the following would be the new real interest rate and how does it compare to the value of r you found in question 35 above:

Question 38 options:

	r = 0.05625 or 5.625%, it has fallen compared with the results in question 35
	With output unchanged the real interest rate would remain the same
	r = 0.1 to 10%, it has risen compared with the results in question 35
	r = 0.0437 or 4.37%, it has fallen compared with the results in question 35