a. Explain the meaning of each of these equations. b. What is the marginal propensity to consume in this economy? c. Suppose the central bank adjusts the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. How does it compare to the full-employment level?

a. Explain the meaning of each of these equations. b. What is the marginal propensity to consume in this economy? c. Suppose the central bank adjusts the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. How does it compare to the full-employment level?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

11. Consider an economy described by the following
equations:
Y =C +I + G
C = 100 + 0.75(Y – T)
I = 500 – 50r
G= 125
T = 100
where Y is GDP, C is consumption, I is investment, G is
government purchases, T is taxes, and r is the interest
rate. If the economy were at full employment (that is,
at its natural level of output), GDP would be 2,000.
a. Explain the meaning of each of these equations.
b. What is the marginal propensity to consume in
this economy?
c. Suppose the central bank adjusts the money
supply to maintain the interest rate at 4 percent, so
r = 4. Solve for GDP. How does it compare to the
full-employment level?
d. Assuming no change in monetary policy, what
change in government purchases would restore
full employment?
e. Assuming no change in fiscal policy, what change
in the interest rate would restore full employment?

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