The following equations describe an economy. (think of C, I, G, etc., as being measured in

billions and i as a percentage; a 5 percent interest rate implies i = 5.)

C = 0.8(1-

t)Y

T = 0.25

I = 900-50i

G = 800

L = 0.25Y - 62.5i

M/P = 500

a)

What is the value of

G

which corresponds to the simple multiplier (with taxes) of chapter 9?

b)

By how much does an increase in government spending of G (300) increase the level of

income in this model, which includes the money market?

c)

By how much does a change in government spending of G (300) affect the equilibrium

interest rate?

d)

Explain the difference between your answers to parts (a) and (b)