Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50.What is the immediate impact on income before the economy adjusts to its new equilibrium? What are the economy’s equilibrium level of output Y and interest rate r following the fall in autonomous consumption? Compute the equilibrium level of consumption and investment spending. With the help of the IS/LM graph, carefully explain what happens to the economy following the fall in consumer confidence. Consider a closed economy where the goods and money markets are described by the following relationships:C = 500+ 0.8(Y – T)-I = 500 10rMP= 0.1Y - 35rG = 800T = 200M = 1000P = 2Where C is planned consumption, I is planned investment spending, T is government tax revenues, G isgovernment purchases, M is the money supply, P is the price level and r is the interest rate.

Provided information: The consumption function of the economy- C = 500 + 0.8 (Y - T) Invest…

Answered: Consider a closed economy where the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Due to some negative news concerning the impact of global warming on the economy, consumers are becoming more pessimistic about the future to the point of reducing autonomous consumption by 50.

1. What is the immediate impact on income before the economy adjusts to its new equilibrium?
2. What are the economy’s equilibrium level of output Y and interest rate r following the fall in autonomous consumption? Compute the equilibrium level of consumption and investment spending. With the help of the IS/LM graph, carefully explain what happens to the economy following the fall in consumer confidence.

Consider a closed economy where the goods and money markets are described by the following relationships:
C = 500+ 0.8(Y – T)
-
I = 500 10r
M
P
= 0.1Y - 35r
G = 800
T = 200
M = 1000
P = 2
Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is
government purchases, M is the money supply, P is the price level and r is the interest rate.

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