Consider an economy described by the following equations:Y = C+I+GC = 100+0.75 (Y-T)I = 500-50rG = 125T = 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 rate), GDP would be 2,000.Explain the meaning of each of these equations.What is the marginal propensity to consume in this economy?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?Assuming no change in monetary policy, what change in government purchases would restore full employment?Assuming no change in fiscal policy, what change in the interest rate would restore full employment?

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Answered: Consider an economy described by the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 rate), GDP would be 2,000.

Explain the meaning of each of these equations.
What is the marginal propensity to consume in this economy?
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?
Assuming no change in monetary policy, what change in government purchases would restore full employment?
Assuming no change in fiscal policy, what change in the interest rate would restore full employment?

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