Question

1. An economy has full-employment output of 5000. Government purchases are 1000. Desired consumption and desired investment are given by

C^{d}= 3600 - 2000r + 0.10Y

I^{d} = 1200 - 4000r

where Y is output and r is the expected real interest rate.

(a) Find the real interest rate that clears the goods market. Assume that output equals full-employment output.

(b) Calculate the amount of saving, investment, and consumption in equilibrium.

Answer #1

(a) Y = C^{d} + I^{d} + G^{d}

Where Y= output

C^{d}= consumption

I^{d}= Investment purchases

G^{d}=Government purchases

Y= (3600 - 2000r + 0.10Y) + (1200 - 4000r) + 1000

Y=5800-6000r+0.10Y

0.9Y=5800-6000r

At full employment Y=5000

Putting the value of Y in the above equation

0.9*5000=5800-6000r

5800-4500=6000r

r=0.217

Therefore real interest rate is 0.217 or 21.7%.

(b) S^{d} = Y - C^{d} - G

where S^{d} is national saving

S^{d} = Y - (3600 - 2000r + 0.1Y) - 1200

S^{d} = 5000-(3600 - 2000*0.217 + 0.1*5000) - 1200
=5000-3600+434-500-1200 = 134

Therefore, saving = 134

I^{d}= 1200-4000*0.217 =332

Therefore, investment is 332

C^{d}= 3600-2000r+0.10Y=3600-434+500=3666

Therefore, consumption is 3666.

Consider the following economy (with flexible exchange rate
system):
• Desired consumption: Cd = 300 + 0.5Y − 2000r
• Desired investment: Id = 200 − 3000r
• Government purchases: G = 100
• Net export: NX = 350 − 0.1Y − 0.5e
• Real exchange rate: e = 20 + 1000r
• Full employment: Y ̄ = 900.
• Nominal money stock: M = 4354
• Real money demand: L = 0.5Y − 200r
(a) Find the equations for...

The
components of planned aggregate spending in a certain economy are
given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r
Planned Investment: I p = 400–3000r Government Revenue and
Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the
real interest rate (For example, r = 0.01 means that the real
interest rate is 1 percent). (1) Find the level of public saving.
(2) Suppose that the real interest...

3. The components of planned aggregate spending in a certain
economy are given by Consumption Function: C = 800 + 0.75(Y - T) –
2000r
Planned Investment: Ip = 400–3000r
Government Revenue and Spending: T = 300 and G = 450 Net Export: NX
= 75
where r is the real interest rate (For example, r = 0.01 means
that the real interest rate is 1 percent). (1) Find the level of
public saving.
(2) Suppose that the real interest...

Consider a small open economy with desired national saving of Sd
= 1000 + 1000rw and desired investment of Id = 1000 - 500rw.
Calculate national saving, investment, and the current account
balance in equilibrium when the real world interest rate is
(a) rw = 0.025. (b) rw=0.05. (c) rw = 0.0.

3. Suppose that the expected future marginal product of capital
is MPKf = 20 – 0.02K, where K is the future
capital stock. The depreciation rate of capital, d, is 20%
per period. The current capital stock is 900 units of capital. The
price of a unit of capital is 1 unit of output. Firms pay taxes
equal to 50% of their output. The consumption function in the
economy is C= 100 + 0.5Y-200r, where C is consumption, Y is...

A large open economy has desired national saving of Sd = 1200 +
1000rw, and desired national investment of Id = 1000 - 500rw. The
foreign economy has desired national saving of = 1300 + 1000rw, and
desired national investment of = 1800 - 500rw. Suppose the foreign
country's government increases its spending by 300 and private
saving does not change. Then in equilibrium, the foreign country
has net exports equal to

in a small open economy with full employment, consumption
depends only on disposable income. National saving is 300,
investment is given by I = 400 – 20r, where
r is the real interest rate measured in percentage, and
the world real interest rate is 10 percent.
Compute the investment, trade balance, and net capital
outflow.

An economy has government purchase of $20, and level of output
of $100, it also has consumption and savings as follows:
C=200r+20
S=100r+45
(each question is separate and do not
build on each other)
What is the equilibrium interest rate and
saving/investment?
If government purchase increase to $40, what is the equilibrium
interest rate and saving/investment?
If level of output decreases to $80, what is the equilibrium
interest rate and saving/investment?
If there is a positive saving shock leading to...

Suppose that in the flexible-price full-employment model of this
chapter the government increases taxes and government purchases by
equal amounts. The tax increase reduces consumption spending. What
happens qualitatively (tell the direction of change only) to
investment, net exports, the exchange rate, the real interest rate,
and potential output?

Consider a closed economy, where output equals the full
employment level of output Y=¯Y=4000, and
G=0,C^d=-1000r+0.75Y,I^d=1200-4000r
Question 19: The equilibrium real interest rate is:
A. less than or equal to 2%
B. more than 2%, but less than or equal to 3%
C. more than 3%, but less than or equal to 4%
D. more than 4%, but less than or equal to 5%
E. more than 6%
Question 20: The desired investment is:
A. less than or equal to...

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