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Consider an economy described by the following equations: Y = C + I + G C = 100 + 0.75( Y – T ) I = 500 – 50 r 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.”

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
BuyFind

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

Solutions

Chapter
Section
Chapter 21, Problem 11PA
Textbook Problem
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Consider an economy described by the following equations:

       Y = C + I + G

       C = 100 + 0.75(YT)

       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.

  1. a. Explain the meaning of each of these equations.
  2. b. What is the marginal propensity to consume in this economy?
  3. 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?
  4. d. Assuming no change in monetary policy, what change in government purchases would restore full employment?
  5. 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.”

Expert Solution

Subpart (a):

To determine

Equations describing the economy.

Explanation of Solution

Y=C+I+G : Output is the summation of consumption, investment, and government expenditure. The equation explains the equilibrium condition for GDP or output in a closed economy.

C=100+0.75(Y-T) : The equation implies the consumption as a function of disposable income

Expert Solution

Subpart (b):

To determine

Equations describing the economy.

Expert Solution

Subpart (c):

To determine

Equations describing the economy.

Expert Solution

Subpart (d):

To determine

Equations describing the economy.

Expert Solution

Subpart (e):

To determine

Equations describing the economy.

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