Consider an economy described by the following equations: Y=C+I+G C=100+.75(Y−T)C=100+.75(Y−T) I=500−50rI=500−50r G=125G=125 T=100T=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. Questions: a. What is the value of the multiplier? b. What is the equilibrium equation for Y? Show 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? 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. e. In this case, explain the policy that was used by the policymaker to target the aggregate demand.
Consider an economy described by the following equations:
Y=C+I+G
C=100+.75(Y−T)C=100+.75(Y−T)
I=500−50rI=500−50r
G=125G=125
T=100T=100
Where: Y is
Questions:
a. What is the value of the multiplier?
b. What is the equilibrium equation for Y? Show 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?
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.
e. In this case, explain the policy that was used by the policymaker to target the aggregate demand.
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