Suppose you are given the following Keynesian model for the economy of Sangrila Land:

Consumption: C=3000 + 0.75Y

Investment: I=4000

Government: G=3000

Net exports: (X-M)=0

Assume the taxes are zero.

a. Find the equilibrium level of real GDP. What is the multiplier in this model?

b. Assume investment increases by $10,000, what is the new equilibrium?

c. Use a "Keynesian Cross" (45 degree line) graph to show the equilibrium level of real GDP in parts ‘a’ and ‘b’. Use your graph and the multiplier concept to explain how the economy moves from one equilibrium to the next.

d. If the tax is levied to collect $400 for the economy, what will be the new equilibrium? Show your calculations.