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 Yis GDP, Cis consumption, Iis investment, Gis government purchases, Tis taxes, and ris the interest rate. If the economy were at full employment (that is, at its natural rate), GDF would be 2,000. a. Explain the meaning of each of these equations. b. What is the marginal propensity to consume in this economy? c. 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?

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 Yis GDP, Cis consumption, Iis investment, Gis government purchases, Tis taxes, and ris the interest rate. If the economy were at full employment (that is, at its natural rate), GDF would be 2,000. a. Explain the meaning of each of these equations. b. What is the marginal propensity to consume in this economy? c. 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?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 11PA

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