An Economy Has Full-Employment Output of 5000

question 50

Essay

An economy has full-employment output of 5000.Government purchases are 1000.Desired consumption and desired investment are given by
C^d = 3000 - 2000r + 0.10Y
I^d = 1000 - 4000r
where Y is output and r is the expected real interest rate.
(a)Find the real interest rate that clears the goods market.Assume that output equals full-employment output.
(b)Calculate the amount of saving,investment,and consumption in equilibrium.
(c)If a shock to wealth causes desired consumption to decline by 200 (so that the new equation for desired consumption is C^d = 2800 - 2000r + 0.10Y),find the equilibrium real interest rate,saving,investment,and consumption.

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