Consider an economy described by the following equations.
Y= C + I + G
C= 100 + .75 (Y - T)
I= 500 - 50r
G= 125
T= 100
Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest.
Answer the questions based on the following equations above.
a. What is the value of the multiplier?
b. What is the equilibrium equation for Y? Show your solution.
c. Suppose the Central Bank policy is to adjust the money supply to maintain the interest rate at 4 percent, so r=4. What is the value of output? Show your solution.
d. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output. Show your solution.
e. In this case, explain the policy that was used by the policymaker to target the aggregate demand.
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