Essay
The following equations describe a Keynesian model of the economy:
Cd = 500 - 0.5(Y - T) - 100r
Id = 350 - 100r
L = 0.5Y - 200i
πe = 0.05, G = T = 200, Y = 1850
M = 3560
a. Find the full-employment equilibrium values of the real interest rate, consumption, investment, and the price level.
b. Suppose government purchases decline to 175, with no change in taxes. What happens to the real interest rate, output, consumption, and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate, consumption, investment, and the price level?
c. Suppose instead that government purchases rise to 225, with no change in taxes, starting from the equilibrium in part (a). What happens to the real interest rate, output, consumption, and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate, consumption, investment, and the price level?
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a. Sd = Y - Cd - G = 0.5Y - 400 + 100r - G. S...View Answer
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