QuestionConsider an economy described by the following equations:Y = C+I+GC = 100+0.75 (Y-T)I = 500-50rG = 125T = 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. What is the marginal propensity to consume in this economy?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?Assuming no change in monetary policy, what change in government purchases would restore full employment?Assuming no change in fiscal policy, what change in the interest rate would restore full employment?

The national income equation is written as: GDP=C+I+G+X-M C--- consumption I--- investment…

Answered: Consider an economy described by the…

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

See similar textbooks

Related questions

Question

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.

What is the marginal propensity to consume in this economy?
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?
Assuming no change in monetary policy, what change in government purchases would restore full employment?
Assuming no change in fiscal policy, what change in the interest rate would restore full employment?

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions