A Classical Economy Is Described by the Following Equations

question 48

Essay

A classical economy is described by the following equations:
C^d = 500 + 0.5(Y - T) - 100r
I^d = 350 - 100r
L = 0.5Y - 200I
Y = 1850
π^e = 0.05
Government spending and taxes are equal where T = G = 200. The nominal money supply M = 3560.
a. What are the equilibrium values of the real interest rate, the price level, consumption, and investment?
b. Suppose an economic shock increases desired investment by 10, so it is now I^d = 360 - 100r. How does this affect the equilibrium values of the real interest rate, the price level, consumption, and investment?
c. Returning to the initial situation in part (a), suppose an economic shock increases desired consumption by 10, so it is now C^d = 510 + 0.5 (Y - T) - 100r. How does this affect the equilibrium values of the real interest rate, the price level, consumption, and investment?

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Definitions:

Pearson Correlation

A measure of the linear correlation between two variables X and Y, giving a value between -1 and 1.

Variance

A measure of variability that describes the spread of a data set by taking the average of the squared differences from the mean.

Degrees of Freedom

The count of distinct values or quantities that can be allocated to a statistical distribution.

Sample Size

The number of observations or data points that constitute a sample from a population.