Question

The components of planned aggregate spending in a certain economy are given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r Planned Investment: I p = 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? 7 (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

Real interest rate should be 6% for full employment level