-The Following Equations Describe a Keynesian Model of the Economy

question 72

Essay

-The following equations describe a Keynesian model of the economy.
(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:

Pareto Optimal

A state of allocation of resources from which it is impossible to make any one individual better off without making at least one individual worse off.

Public Goods

Goods that are non-excludable and non-rivalrous, meaning they are available to all members of a society, such as public parks and national defense.

Private Consumption

The total amount of goods and services consumed by individuals in a household.

Pareto Optimal

A situation where resources are distributed in such a way that improving one person's condition inevitably leads to the detriment of another individual.