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1. Suppose that the behavior of households and firms in an economy is determined by the following equations +0.9Y Ii(intended investment)

Answer the following questions, using algebraic manipulations only.

What is the equation for the AD curve?

What is the level of equilibrium income?

If intended investment increases by 10 units to 60 units, by how much will equilibrium income rise? How much will be the new equilibrium income?

2. Using Table 10.1 (see textbook or lecture notes) and the formulas and numbers given in the text for the multiplier and tax multiplier, calculate the effect on equilibrium GDP of a government spending level of 100 combined with a tax level of 100. What does this imply about the impact of a balanced government budget on GDP, compared to government spending alone?

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