Economics 200 Consider the following model of aggregate demand

| November 24, 2016

Take Home Problem

Economics 200

Consider the following model of aggregate demand, in which there is no international trade, the price level is fixed, and the symbols are defined as in class (all dollar amounts in billions):

C = 10 + (10/11)DI

I = 15

G = 15

Taxes = (1/10)GDP

Determine the equilibrium GDP in this economy (show your work). Draw this equilibrium on a properly labeled graph. Then use the multiplier to determine what will happen to equilibrium GDP if there is an exogenous 20 billion dollar increase of government purchases. As a result of this change, what will happen to the equilibrium values of consumption, saving, and the government budget deficit? Explain.

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