Aggregate Expenditure, Keynesian Cross

Consider the following economy for which the parameters have been estimated:

• The desired consumption C = 400 + 0.8YD;
• The gross investment I = 100;
• The taxes are T = 0.2Y;
• The government purchases G = 500;
• The imports are IM = 0.3Y;
• The exports are X = 650.

1. Calculate the marginal propensity to spend. (2)
2. Calculate the simple multiplier (with government & foreign trade). (2)
3. Find the equilibrium national income (demand determined). (2)
4. If the government has decided to increase its purchases to G = 700, other things being equal, what would be the new equilibrium national income (demand determined)? (2)
5. How would you calculate the simple multiplier based on your answers to (3), (4), and the fact that the government has increased its purchases from G = 500 to G = 700? Show your work. (2)
6. What happens to the budget balance when the government has increased its purchases from G = 500 to G = 700? Show your calculations and describe in words (using the terms budget surplus, budget deficit, and/or balanced budget). (2)