. Suppose the central bank’s policy is to adjust the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. Is it greater or lower than full-employment level? How much 2. Assuming no change in monetary policy (as was in part i), what change in government purchases would restore full employment? 1. Assuming no change in fiscal policy, what change in the interest rate would restore full employment?
Consider an economy described by the following equations:
Y = C + I + G (1)
C = 100 + 0.75(Y − T) (2)
I = 500 – 50 r (3)
G = 125
T = 100
where Y is
is taxes, and r is the interest rate. If the economy were at full employment (that
is, at its natural rate), GDP would be 2,000.
1. Suppose the central bank’s policy is to adjust the money supply to
maintain the interest rate at 4 percent, so r = 4. Solve for GDP. Is it greater
or lower than full-employment level? How much
2. Assuming no change in
government purchases would restore full employment?
1. Assuming no change in fiscal policy, what change in the interest rate
would restore full employment?
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