Consider a hypothetical economy where: C(Yd)=30+2/3(Y ?T) I(r) = 52 ? 0.2 r G = 160 t = 0.4 (represents 40%) - What are the equilibrium values of the interest rate, r, and investment, I? (Hint: use the MPR or IS, and I(r) equations.) - Suppose that the level of Government expenditure increases to G = 180. What is the equi- librium value of agg

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Consider a hypothetical economy where: C(Yd)=30+2/3×(Y ?T) I(r) = 52 ? 0.2 × r G = 160 t = 0.4 (represents 40%)

- What are the equilibrium values of the interest rate, r, and investment, I? (Hint: use the MPR or IS, and I(r) equations.)

- Suppose that the level of Government expenditure increases to G = 180. What is the equi- librium value of aggregate income, Y ? (Note: you will no longer get a round number for Y.)

- What are the new equilibrium values of the interest rate, r, and investment, I?

- Discuss why how the increase in G impacts Y , r and I in the context of the ideas of fiscal stimulus, spending multipliers, and crowding-out.

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