Question

An economy is described by the following equation:

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

I^P = 2500 - 1000 r

G = 2000

T = 1500

C is the consumption, I^P 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 S_Public.

Y =

S_Public = -  

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^*=

Answer 1