Consider in a country A: money supply M=3000, price level P=3, inflation expectation andliquidity preference is assumed to be zero to make the calculation simple. The money demandfunctionL(i,Y) =Y−200∗(r+πe). Consumption C=300+0.8*(Y-T)-20*r, investment functionis I=700-80*r, government spending and tax are both 500. (1) Solve the real interest rate and the real GDP in equilibrium. (2) If government spending and tax both increases by 150 to keep the government budgetbalance, what is the new equilibrium real interest rate and the new equilibrium real GDP.
Consider in a country A: money supply M=3000, price level P=3, inflation expectation andliquidity preference is assumed to be zero to make the calculation simple. The money demandfunctionL(i,Y) =Y−200∗(r+πe). Consumption C=300+0.8*(Y-T)-20*r, investment functionis I=700-80*r, government spending and tax are both 500. (1) Solve the real interest rate and the real GDP in equilibrium. (2) If government spending and tax both increases by 150 to keep the government budgetbalance, what is the new equilibrium real interest rate and the new equilibrium real GDP.
Chapter20: Monetary Policy
Section20.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model
Problem 4SQ
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Consider in a country A: money supply M=3000, price level P=3, inflation expectation andliquidity preference is assumed to be zero to make the calculation simple. The money demandfunctionL(i,Y) =Y−200∗(r+πe). Consumption C=300+0.8*(Y-T)-20*r, investment functionis I=700-80*r, government spending and tax are both 500.
(1) Solve the real interest rate and the real GDP in equilibrium.
(2) If government spending and tax both increases by 150 to keep the government budgetbalance, what is the new equilibrium real interest rate and the new equilibrium real GDP.
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