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12. Consider an economy
Consider an economy described by the following equations:
$Y = C + I + G$
$C = 100 + 0.75 \times (Y - T)$
$I = 500 - 50 \times r$
$G = 125$
$T = 100$
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 the natural rate of output), GDP would be $2,000.
Identify the equation(s) each of the following statements describes. Check all that apply.
Statement
C
I
G
T
It is an autonomous amount, independent of other factors.
?
?
?
?
It is a function of disposable income.
?
?
?
?
It depends on the interest rate.
?
?
?
?
The marginal propensity to consume in this economy is
0.75
Suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 4%, so $r = 4$.
When the interest rate is 4%, GDP is
$1,800
GDP at an interest rate of 4% is below the full-employment level.
Assuming no change in monetary policy, an increase in government purchases by $
(Note: Assume that this change in fiscal policy has no crowding-out effect.)
would restore GDP to the full-employment level.
Assuming no change in fiscal policy,
in the interest rate by
% would restore GDP to the full-employment level.
