Let: C = consumption I = investment spending G = government spending Tx = tax revenue Yd = after-tax income MS = money supply MD = money demand r = interest rate Assume for a given closed economy: (i) Consumers spend $200 billion plus 80% of after-tax income, or C=200+0.8 Yd (ii) Investment demand varies inversely with the interest rate, such that I= 500-2000r (iii) Currently government spending and taxes are both $250 billion, or G=250 and Tx=250, (iv) The total money demand or liquidity preference schedule for this economy is an inverse function of the rate of interest and is given by the equation MD=850-1000r (v) The required reserve ratio for banks in this economy is 20%. No bank holds excess reserves, and everybody keeps their money in the bank. The total of reserves in the banks is $150 billion. Answer the following questions given the information above. d) The central bank wants national income to be $3000 billion. What must investment be for the equilibrium level of national income to be $3000 billion (if investment alone changes in response to the change in the interest rate)? e) At what interest rate is this level of investment (your answer to part (d)) achieved?
Let: C = consumption I = investment spending G = government spending Tx = tax revenue Yd
= after-tax income MS = money supply MD = money demand r = interest rate
Assume for a given closed economy:
(i) Consumers spend $200 billion plus 80% of after-tax income, or
C=200+0.8 Yd
(ii) Investment demand varies inversely with the interest rate, such that
I= 500-2000r
(iii) Currently government spending and taxes are both $250 billion, or
G=250 and Tx=250,
(iv) The total money demand or liquidity preference schedule for this economy is an inverse
function of the rate of interest and is given by the equation
MD=850-1000r
(v) The
reserves
$150 billion.
Answer the following questions given the information above.
d) The central bank wants
for the equilibrium level of national income to be $3000 billion (if investment alone changes in response to the change in the interest rate)?
e) At what interest rate is this level of investment (your answer to part (d)) achieved?
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