Desired Consumption Is C^d = 2000 + 0

question 37

Essay

Desired consumption is C^d = 2000 + 0.9Y - 100,000 r - G, and desired investment is I^d = 1000 - 45,000r. Real money demand is M^d/P = Y - 6000i. Other variables are π^e = 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:

Option

A financial derivative that represents a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price on or before a specified date.

Employee Stock Options

A right, purchased from one party by another, granting the purchaser the option, but not the requirement, to either buy (call) or sell (put) a share at a pre-decided price during a specific timeframe or on a certain date.

Align Goals

The process of adjusting strategies or actions to ensure that various objectives or aims are in harmony or agreement.

Shareholder Goals

The objectives or desired outcomes of individuals or entities that own shares in a corporation, usually focused on value appreciation, dividends, and company governance.