Question

An economy is described by the following equation: C = 1600 + 0.6 (Y - T)...

An economy is described by the following equation:

C = 1600 + 0.6 (Y - T) - 2000 r

IP = 2500 - 1000 r

G = 2000

T = 1500

C is the consumption, IP is the planned investment, G is the government spending, T is the net taxes, r is the real interest rate.

This economy is a closed economy meaning that the Net Exports are always 0, i.e. NX = 0.

a. Find an equation relating the planned aggregate expenditure (PAE) to the output and the real interest rate.

PAE =  +   Y -  r

b. Let the real interest be 4 percent. Find the short-run equilibrium output Y and the public saving SPublic.

Y =

SPublic = -  

c. The central bank of this economy sets the real interest using the following rule: r = 0.02 + π (π is the inflation rate). Find the aggregate demand curve.

Y =  -   π

d. The potential output Y* is 12625, what is the long-term equilibrium inflation rate π*.

π*=

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