12. Consider an economy
Consider an economy described by the following equations:
$Y = C + I + G$
$C = 120 + 0.8 \times (Y - T)$
$I = 500 - 50 \times r$
$G = 150$
$T = 125$
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 $2,850.
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 _____.
Suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 3%, so $r = 3$.
When the interest rate is 3%, GDP is $_____.