Brief Principles of Macroeconomics...
Brief Principles of Macroeconomics...
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 Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at its natural rate), GDP 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?
- d. Assuming no change in monetary policy, what change in government purchases would restore full employment?
- e. Assuming no change in fiscal policy, what change in the interest rate would restore full employment?
To find additional study resources, visit cengagebrain.com, and search for “Mankiw.”
Subpart (a):
Equations describing the economy.
Subpart (b):
Equations describing the economy.
Subpart (c):
Equations describing the economy.
Subpart (d):
Equations describing the economy.
Subpart (e):
Equations describing the economy.
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