The economy of this question is initially characterized as follows: T= .25 Y C-

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The economy of this question is initially characterized as follows: T= .25 Y C- 100+s YD I -150 +0.1 Y- 1000 (r x) G- 200 The IS relation between output, Y, and the risk-free real interest rate, r, is given by Y = 450 + .6Y_ 1000 (r + x)-2.5x(450-1000 (r + x)] IS: Y- 1050-2500r where x, the risk premium on business borrowing, is initially 0.03 The economy is initially at full employment equilibrium-the value Y, you computed in part (b) is the economy's potential output, Yp Things have been going so well, however, that people have become cocky. They figure that hardly anyone will default on a loan. The risk premium falls from 3% to 1%, that is, tox-.01. The economy expands. Explain in words what happens when risk premium, x, declines from 3% to 196 other things equal (5 points each) f) i) Investment spending, I, increases because rises ii) Consumption spending, C, increases because bue to nse in economy investment mtomne, ii) The government's budget surplus, T-G, increases because

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