**ECN 101 Intermediate Macroeconomics Homework 4**

1. Basic Multiplier Model: Review

**Suppose the components of the Aggregate Expenditure as follows:**

Y = C + I + G + NX

C = 200 + .8Yd = 200 + .8 (Y – T)

I = 800

G = 600

NX = 200

T = 800

**a) **Is the government budget balanced, in deficit or in surplus? Explain.

**b) **What is the value of the expenditures multiplier?

**b)** Calculate the equilibrium income.

**c)** If Government Spending (G) increases by 300, calculate the value of the new equilibrium income? How much did equilibrium income change as a result of the increase in investments? What is the effect on the budget?

**2. AS and AD
A. Using your AS/AD model, illustrate how the following affects the economy in the short run (SRAS is horizontal).**

**i. **The government increases spending.

**ii.** Wages decrease significantly as a result of a large wave of immigration.

**iii.** The government increases taxes in order to minimize the budget deficit.

**B. Redo part A, using your long run AS-AD model (LRAS is vertical). Make sure you illustrate the transition from short run to long run.**

**3. Finding the Equilibrium
Assume that the economy can be described as the following:**

C= .8(Y-T)

I = 800 – 2000 r

G = 1000

T = 1000

(M/P)D = .4Y – 4000r

(M/P)S = 1200

**b)** Derive the equation for the IS curve, expressing Y as a function of r.

**c) **Derive the equation for the LM curve, expressing Y as a function of r.

**d) **Find the equilibrium values for Y, r, C, I.

**e)** Compute for the new equilibrium values for Y, C, I and r if G increases to 1200.