1. The following equations describe a particular macroeconomic system:

C = 100,000 + .85Y

I = 85,000

G = 15,000

Assume, to start, that there are no taxes. Find the equilibrium level of aggregate output Y. Check your solution. What is the multiplier in this economy? If the full employment level of aggregate output is 1,010,000, how much would the government have to increase or decrease its spending to bring aggregate demand into line with Y_fe?

2. The following equations describe a particular macroeconomic system:

C = 100,000 + .85Y_d

I = 85,000

G = 15,000

T = .06Y

Find the equilibrium level of aggregate output Y; the economy's tax bill T; the level of disposable income Y_d; consumption spending C; and the level of Saving when the economy is in equilibrium. Check your results and illustrate the solution in a diagram.

What is the multiplier in this economy?

If the full employment level of aggregate output is 740,000, how much would the government have to increase or decrease its spending to bring aggregate demand into line with Y_fe?

Suppose the tax code were altered to include a tax credit for households at low level of incomes, so that the fourth equation were now:

T = -2,000 + .06Y

Find the new equilibrium level of aggregate output Y; the economy's tax bill T; the level of disposable income Y_d; consumption spending C; and the level of Saving when the economy is in equilibrium. Check your results.

3. A bond has a coupon payment of $100; interest is paid and compounded annually. It will mature in three years. Its face value is $1,000 and the yield on bonds of similar risk and maturity is 7.5%. What will be the price of this bond? Suppose the market rate of interest rose to 12%; what would happen to the price of the bond?