Question

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 rate is 5%. Show the autonomous consumption level and the autonomous expenditure level.

(3) How does a two percentage point decrease in the real interest rate affect the short-run equilibrium output?
(4) Suppose that the potential output of this economy equals 4800. Find the short-run equilibrium real interest rate that brings the economy to full employment.
(5) Suppose Government Revenue T = tY (0< t <1); r stays at the initial level (5%), Please calculate the multiplier effect of the government spending increase on the output change (ΔY/ΔG).

Answer 1