A Keynesian economy is described by the following equations. Desired consumption equation: Cd = 300 + 0.4(Y – T) – 300r Desired investment equation: I d = 300 – 300r Government purchases G = 317 Taxes T = 305 Money demand equation L = 0.4Y – 600(r + πe ) The nominal money supply M = 4428 The expected rate of inflation, πe = 0.03 Full-employment values of output Y = 1305 2 (a) Calculate the values of the real interest rate, the price level, consumption, and investment for the economy in general equilibrium. (b) Now suppose government purchases increase to 347 with no change in taxes. What will be the real interest rate, the price level, output, consumption, and investment in the short run? What will be the real interest rate, the price level, output, consumption, and investment in the long run?
A Keynesian economy is described by the following equations. Desired consumption equation: Cd = 300 + 0.4(Y – T) – 300r Desired investment equation: I d = 300 – 300r Government purchases G = 317 Taxes T = 305 Money demand equation L = 0.4Y – 600(r + πe ) The nominal money supply M = 4428 The expected rate of inflation, πe = 0.03 Full-employment values of output Y = 1305 2 (a) Calculate the values of the real interest rate, the price level, consumption, and investment for the economy in general equilibrium. (b) Now suppose government purchases increase to 347 with no change in taxes. What will be the real interest rate, the price level, output, consumption, and investment in the short run? What will be the real interest rate, the price level, output, consumption, and investment in the long run?
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