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.
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*.
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