Version:0.9 StartHTML:0000000105 EndHTML:0000004990 StartFragment:0000000141 EndFragment:0000004950 Consider the following closed economy. The consumption function (C) is given as

C = 500 + 0.75 (Y T)

(a) Given the information provided above, calculate the impact of a $10000 increase

in government purchases on the goods market equilibrium output (Y ) using the

Keynesian Cross model, assuming that interest rates remain unchanged. (3 marks)

(b) Given the information provided above, calculate the impact of a $10000 decrease in

taxes on the goods market equilibrium output (Y )using the Keynesian Cross model,

assuming that interest rates remain unchanged. (3 marks)

(c) Suppose the government decreases taxes. According to the IS-LM model, what

happens to the interest rate, income, consumption and investment? Illustrate your

answer with an appropriate IS-LM diagram, and provide a brief written explanation of

the shifts to the IS and/or the LM curve. (8 marks)

(d) Suppose the government decreases taxes by $10000. Does the Keynesian Cross

model predict a bigger or smaller change in equilibrium income than the IS-LM

model? Brieflfly explain why the IS-LM model predicts different change in equilibrium

output than your answer to part (b). (4 marks)