Econ 1. In chapter 3, Table 3-1, we found GDP in 2010 was roughly $15,000 billion. You learned in Chapter 1 that GDP fell by approximately 3

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1. In chapter 3, Table 3-1, we found GDP in 2010 was roughly $15,000 billion. You learned in Chapter 1 that GDP fell by approximately 3 percentage points in 2009. Use the simplest model of fiscal policy from Chapter 3 to answer the following. 

How many billion dollars did GDP fall by in 2009? ? 

If the propensity to consume were 0.5, by how much would government spending have to have increased to prevent a decrease in output ? 

If the propensity to consume was 0.5,by how much would taxes have to have been cut to prevent any decrease in output ? 

Suppose Congress had chosen to both increase government spending and raise taxes by the same amount in 2009. What increase in government spending and taxes would have been required to prevent the decline in output in 2009? 

3. Label each of the following statements true, false, or uncertain. Explain briefly. 

The main determinants of investment are the level of sales and the interest rate. 

The IS curve is downward sloping because goods market equilibrium implies that an increase in taxes leads to a lower level of output. ? 

The LM curve is upward sloping because a higher level of the money supply is needed to increase output. ? 

An increase in government spending leads to a decrease in investment. ? 

Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) 

Derive the LM relation. (Hint: It will be convenient for later use to rewrite this equation with i on the left side and everything else on the right.) ? 

Solve for equilibrium real output. (Hint: Substitute the expression for the interest rate given by the LM equation into the IS equation and solve for output.) ? 

Solve for the equilibrium interest rate. (Hint: Substitute the value you obtained for Y into either the IS or LM equations and solve for i. If your algebra is correct, you should get the same answer from both equations.) ? 

Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. ? 

Now suppose that the money supply increases to M/P = 1,840. Solve for Y, i, c, and T, and describe in words the effects of an expansionary monetary policy. ? 

Set M/P equal to its initial value of 1,600. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary fiscal policy on Y, i, and C. ?