1. Consider the circular flow diagram presented in Lecture #3. Let c0=6, c1=3/4, I-bar=15, G-bar=T-bar=16.

a. Compute equilibrium Y for the Keynesian Cross model.

b. Construct the circular flow diagram for this model, putting in the numbers corresponding to each flow.

c. Suppose government purchases, G-bar, jumps to 20.

(i) What is the new equilibrium level of output, consumption and investment?

(ii) Suppose output reaches the new equilibrium after numerous rounds when production in the period equals production in the previous period, minus unplanned inventory investment in the previous period. Draw the circular flow diagram for the period in which the drop in G-bar occurs. Draw it for the next two periods.

2. Question 2, page 38; question 9, page 39.