Desired Consumption Is Cᵈ = 2000 + 0

question 26

Essay

Desired consumption is Cᵈ = 2000 + 0.9Y - 100,000r - G,and desired investment is Iᵈ = 1000 - 45,000r.Real money demand is Mᵈ/P = Y - 6000i.Other variables are πᵉ = 0.03,G = 500,Y = 1000,and M = 2100.
a.Find the equilibrium values of the real interest rate,consumption,investment,and the price level.
b.Suppose government purchases decline to 400.What happens to the variables listed in part (a)?
c.Suppose government purchases rise to 600.What happens to the variables listed in part (a)?
d.What feature in this example leads to the result that you don't need to know the amount of taxes collected by the government to find the equilibrium?

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Definitions:

Exchange Rates

The rate at which one currency can be exchanged for another, affecting trade and economic relations between countries.

Long Run

A period of time in economics where all factors of production and costs are variable, allowing for full adjustment to changes.

Net Capital Outflow

The difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners over a specific time period, indicating the flow of capital out of a country.

Mexican Assets

Financial investments or physical properties located in Mexico, including stocks, bonds, real estate, and other forms of assets.