1. Answer the following with respect to the graph below:
a) What is the level of desired investment expenditure (I) and government purchases (G)?
b) What is the autonomous portion of consumption? What is total autonomous expenditure?
c) Starting from equilibrium national income of $250 billion, suppose government purchases decreased by $25 billion. Describe the effects on the AE curve and on equilibrium national income.
d) Starting from equilibrium national income of $250 billion, suppose the net tax rate increased from 10% to 30% of national income. Describe the effects on the AE curve and on equilibrium national income.
e) Starting from equilibrium national income of $250 billion, suppose investment increased by $50 billion. Describe the effects on the AE curve and on equilibrium national income.
2. Answer the following with respect to the diagrams below:
a) Explain in your own words why in Economy A wages and other factor prices will begin to rise, and why this will increase firms' unit costs.
b) Following your answer in part a, show the effect on the AS curve. Explain in your own words what happens to real GDP and the price level.
c) Explain in your own words why in Economy B wages and other factor prices will begin to fall, and why this will decrease firms' unit costs.
d) Following your answer in part c, show the effect on the AS curve. Explain in your own words what happens to real GDP and the price level.