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    Astro Cure
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    1) The document describes an economy at full employment with government purchases of $1200. It provides consumption and investment schedules as functions of the interest rate to derive the equation for desired national savings. 2) Solving the market clearing equation sets the interest rate that balances supply and demand at 0.1. 3) When government purchases increase to $1440, the new interest rate solving the market clearing equation rises to 0.14, demonstrating that higher government spending requires a higher interest rate to balance the goods market.

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    Economics 4

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    1) The document describes an economy at full employment with government purchases of $1200. It provides consumption and investment schedules as functions of the interest rate to derive the equation for desired national savings. 2) Solving the market clearing equation sets the interest rate that balances supply and demand at 0.1. 3) When government purchases increase to $1440, the new interest rate solving the market clearing equation rises to 0.14, demonstrating that higher government spending requires a higher interest rate to balance the goods market.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
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    6 views1 page

    8456965

    Uploaded by

    Astro Cure
    1) The document describes an economy at full employment with government purchases of $1200. It provides consumption and investment schedules as functions of the interest rate to derive the equation for desired national savings. 2) Solving the market clearing equation sets the interest rate that balances supply and demand at 0.1. 3) When government purchases increase to $1440, the new interest rate solving the market clearing equation rises to 0.14, demonstrating that higher government spending requires a higher interest rate to balance the goods market.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 1

    Suppose an economy has full employment output of 6000. government purchases are 1200.

    the
    desired consumption and investment schedules are as follows:
    Cd=3600-2000*i+.10Y;
    Id=1200-4000*i
    a) Specify an equation for desired national saving as a function of the real interest rate and real
    GDP.
    S=Y-C= -3600 +2000i +.9Y
    b) Solve for the real interest rate that clears the clears the Goods Market. (You can Assume that
    real GDP is at the full employment level of real GDP).
    put Y= 6000
    G= 1200
    market clearing equation is Y= C+I+G
    Y= 3600-2000i +.1*6000 +1200 +1200-4000i
    Y=5400 -6000i
    6000 =5400 -6000i
    i= 600/6000= 0.1
    c) Suppose that G increases to 1440. Resolve for the real interest rate and show your results
    graphically. How would you describe this result? 
    Y= 3600-2000i +.1*6000 +1440 +1200-4000i
    Y=5640 -6000i
    6000 =6840 -6000i
    i= 840/6000= 0.14
    Y fe
    r

    .14

    .1

    AD

    6000 Y

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