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 Yis GDP, Cis consumption, Iis investment, G is government purchases, T'is taxes, and ris the interest rate. If the economy were at full employment (that is, at its natural rate), 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's policy is to adjust 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?
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 Yis GDP, Cis consumption, Iis investment, G is government purchases, T'is taxes, and ris the interest rate. If the economy were at full employment (that is, at its natural rate), 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's policy is to adjust 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?
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter24: The Influence Of Monetary And Fiscal Policy On Aggregate Demand
Section: Chapter Questions
Problem 11PA
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