Consider an economy in which C = 1000 + 0.75 YD , I = 200, G = 300, T = 300, and ( X - M ) = 0. Calculate equilibrium GDP. Answer: Calculate saving...

1. Consider an economy in which C = 1000 + 0.75YD, I = 200, G = 300, T = 300, and (X-M) = 0.
2. Calculate equilibrium GDP.

1. Calculate saving at this level of GDP. Hint: Use the equation for leakages.

1. Calculate the spending multiplier.

1. Calculate the tax multiplier.

1. How will equilibrium GDP change if G increases by 100, and what is the new equilibrium level of GDP?

1. How will equilibrium GDP change if G and T both increase by 500, and what is the new equilibrium level of GDP?

(9 points)

1. Crowding out is an important topic.
2. Use a graph of the market for loanable funds to show how the severity of crowding out depends on the slope of the supply curve.

1. Use a graph of the investment demand curve to demonstrate how the severity of crowding out depends on slope of the firm's demand for investment goods.

1. In a couple of sentences, explain how expansionary fiscal policy can lead to lower rates of long-term economic growth.

(2 points)

1. Marginal propensity to consume (MPC) is the slope of the Keynesian AE curve.

(4 points)

1. Explain why the events of the Great Depression were inconsistent with the classical view of the economy.

(4 points)

1. Use the AD/AS model to compare the effects of expansionary fiscal policy at two points on the AS curve: the Keynesian section and full employment. Use graphs, and label everything completely.

(8 points)

1. Taxes may be variously described as progressive, proportional, or regressive, depending on how the percentage of income paid in tax changes as income rises.
2. You can show that a tax on consumption is regressive using the Keynesian consumption function. Suppose C = 1000 + .5YD,and the government collects 10% of all consumption expenditures in taxes. Calculate the taxes paid by the household earning YD = 1000 with the household earning YD = 10,000. Show that the consumption tax is regressive. Show your math.

1. A number of people have argued for a flat tax with each person getting a personal exemption of, say, $10,000, meaning that they pay zero tax on the first $10,000 of income and then 20% on all income above that. Is such a flat tax progressive, proportional, or regressive? Offer an example to demonstrate your answer.