The Following Equations Describe a Keynesian Model of the Economy

question 26

Essay

The following equations describe a Keynesian model of the economy:
C^d = 500 - 0.5(Y - T) - 100r
I^{d =} 350 - 100r
L = 0.5Y - 200i
π^e = 0.05, G = T = 200, Y = 1850
M = 3560
a. Find the full-employment equilibrium values of the real interest rate, consumption, investment, and the price level.
b. Suppose government purchases decline to 175, with no change in taxes. What happens to the real interest rate, output, consumption, and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate, consumption, investment, and the price level?
c. Suppose instead that government purchases rise to 225, with no change in taxes, starting from the equilibrium in part (a). What happens to the real interest rate, output, consumption, and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate, consumption, investment, and the price level?

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Definitions:

FIFO Method

"First In, First Out", an inventory valuation method where goods produced or acquired earliest are sold or used first.

Cost Reconciliation

involves accounting procedures that verify the accuracy of the reported costs, ensuring that the total costs recorded match the actual expenses incurred.

Process Costing

An accounting method used when producing identical or similar products, assigning costs based on the processing phase.

Process Inventory

Goods in various stages of production within a manufacturing process, including raw materials, work-in-progress, and finished goods.