The economy of Ancon is described by the following equations:
T = 1,500, (Taxes)
I = 900, (Investment)
C = 1,800 + 0.6 (Y-T), (Consumption)
G = 1,500, (Govt)
NX = -500. (Net Exports)
1. Determine the equilibrium level of income and indicate it in a graph that includes the aggregate expenditure line and the 45º line.
2. Compared with the original equilibrium, suppose that both government purchases (G) and taxes (T) increase by 250, determine how these changes in G and T affect the equilibrium income using the multiplier. Recalculate the equilibrium level of income after these changes.
3. 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.