2. Assume the following Keynesian model: AE = C + I + G + (X - M) C = 600 + .9Y

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2. Assume the following Keynesian model:

AE = C + I + G + (X - M)

C = 600 + .9Yd

I = 200

G = 100

X = 200

M = 100 + .1Yd

T = 100

a. Find the aggregate expenditure function and equilibrium level of GDP.

b. Using a “Keynesian cross†(or 45-degree line) diagram, show graphically the

equilibrium in part a).

c. What is the spending multiplier in this model? Tax multiplier?

d. What is the level of net exports at equilibrium?

e. At equilibrium, does the government have a budget surplus or a budget deficit? Of how much?

f. If government spending increases by $100, find the new equilibrium level of

GDP. Show graphically.

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