1. Use the one-period model to show the "Crowding Out" effect ofan increase in government expenditures. Follow the steps below to show your answer.
2. Write the equation for the budget constraint of a representative consumer and describe it.
3. Derive the equation for the production possibility frontier and describe it.
4. Draw a PPF, consumer's budget constraint and an indifference curvefor the representative agent, including the optimal bundle. (Draw large enough to be able to show all the details)
5. Now consider government decides to increase its expenditure. Show the effect of this change in your graph.
6. Explain how consumption and leisure change compared to the initial equilibrium and why.
7. Describe income and substitution effects from this change. Be specific about the sign, direction, and the relative magnitude of each effect.