Question

Can somebody check my work and see if I did this right. Please and thank you!

Consider the following model and again answer related questions.

            1. Y = C + I + G + X - M

            2. C = 100 + 0.50Y

            3. I = 400 - 1000r

            4. G = 400

            5. X = 300

             6. M = 100 + 0.25Y

1. How much is equilibrium level of income or output if Fed decides to set the rate

      of interest at 10 percent (r=0.10).

100+0.5Y+400-1000r+400+300-100-0.25Y

Y-.25=1100-1000r

0.75Y=1000

Y=1000/.75

or

Y=4000/3

2. In an effort to cool down the economy, the Fed raises the rate of interest to r

      =0.15. By how much will Y change?

0.75Y=1100-1000r

0.75Y=950

Y=950/.75

or

Y=3800/3

Change=200/3

3. To coordinate the fiscal and monetary policies, assume government decides to

      balance the budget by cutting its spending by 100 and at the same time Fed  

     decides to counter the contractionary effect of cutting spending and lowers the

      rate of interest to r = 0.05. Can you predict the change in Y?

            0.75Y=1000-1000r=950

            Y=3800/3

            4000/3-3800/3=200/3

Answer 1

Your answer is correct