An economy has full-employment output of 1000.
Desired consumption and desired investment are:
$C^d = 200 + 0.90(Y-T)-600r$.
$I^d = 200-300r$.
Taxes are given to be: $T = 25 + 0.25Y$.
Money demand is:
$\frac{M^D}{P} = 0.50 Y - 200(r + \pi^e)$,
where the expected rate of inflation, $\pi^e = 0.10$.
The nominal supply of money $M = 10,100$.
Using the goods market equilibrium condition, determine the equation for the IS curve
for any level of government purchases, G, that gives the market clearing output, Y, given
the real interest rate, r, and G.
(The IS equation will be a relationship involving Y, r, and G. Enter your response
rounded to one decimal place.)
$Y = ........ r + .... G$
Suppose initially the level of government purchases, G = 196. Using this level of G,
determine the equation for the IS curve.
$Y = ........ R$
Given the full employment level of output to be 1000, determine the general equilibrium
values of the real interest rate, consumption, investment and price level.
Real interest rate = .....%
