The economy of Ancona is described by the following equations:
C = 1,800 + 0.6 (Y-T), (Consumption)
I = 900, (Investment)
G = 1,500, (Govt)
T = 1,500, (Taxes)
NX = -500. (Net Exports)
a) Calculate the equilibrium level of income and indicate it in a graph that includes the aggregate expenditure line and the 45º line.
b) Compared with the original equilibrium, suppose that both government purchases (G) and taxes (T) increase by 250, calculate how these changes in G and T affect the equilibrium income using the multiplier. Recalculate the equilibrium level of income after these changes.
c) With the help of two separate graphs, explain how each of the changes described in part (b) would affect the level of real GDP (Y) and the price level (P) in the aggregate demand - aggregate supply model.