1 b
2 a
3 d
4 b
5 b
6 b
7 b
8 c
9 c
10 b
11 c
12 b
13 b
14 d
15 c
16 d
17 b
18 c
19 a
20 d
21 c
22 b
23 d
24 b
25 b
26 b
27 b
28 a
29 b
30 b
31 a
32 a
33 c
34 c
35 d

Problem 1. (Answers)

a. Y = 3,503.45

b. C = 3233.45

c. Private investment multiplier = 2.76
Government spending multiplier = 2.76

If government spending (or private investment) increases by 100 units,
the level of equilibrium income increases by 276 units.

d. Government spending multiplier:
    I. Only lump-sum taxes:
            A. Government spending multiplier = 1/(1-b) = 4
   II. Only marginal income taxes:
            B. Government spending multiplier = 1/(1-b+bt) = 2.76

Note that B < A. When we have marginal income taxes, every time that
income increases, a fraction t of the increase is used to pay taxes.
That is, disposable income to be consumed is smaller than in the case
that we only have lump-sum taxes. Therefore, the increase in consumption
in every round and the subsequent income increase are smaller than they
would have been in the case of lump-sum taxes. Thus, the final increase
in equilibrium income is smaller when we have marginal income taxes.

e. Assume that we have lump-sum taxes instead of marginal income taxes.
        a. Increasing G and T by the same amount.
        b. They are equal.

Problem 2. (In your class notes)