SECTION A The following economy applies to questions 1-3. Assume an economy in which the con- sumption (C) and investment (I) functions are given by C = 100+ 0.5 · (Y – Ť) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 100. The LM (money market equilibrium) curve is M Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is n° = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to a = 0.05. Question 1 Derive the long-run equilibrium values of output Y, consumption C, private and public savings Sprivate and Spublic: investment I, the real and nominal interest rates (r, i) and price P, before and after the vaccine news shock. In particular:

SECTION A The following economy applies to questions 1-3. Assume an economy in which the con- sumption (C) and investment (I) functions are given by C = 100+ 0.5 · (Y – Ť) I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 100. The LM (money market equilibrium) curve is M Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is n° = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to a = 0.05. Question 1 Derive the long-run equilibrium values of output Y, consumption C, private and public savings Sprivate and Spublic: investment I, the real and nominal interest rates (r, i) and price P, before and after the vaccine news shock. In particular:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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