Desired Consumption Is C^d = 2000 + 0

question 14

Essay

Desired consumption is C^d = 2000 + 0.9Y - 100,000r - 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, = 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:

Transfer Prices

Prices charged for the selling of goods and services between subsidiaries or divisions within the same company.

Variable Cost

Expenses that change in proportion to the level of production or business activity.

Negotiation

A strategic discussion that resolves an issue in a way that both parties find acceptable, often used in business to finalize deals, terms, and prices.

Investment Turnover

A metric assessing how effectively a firm turns asset investments into revenue.