An economy has full-employment output of 5000. Government purchases are 1000. Desired consumption and desired investment are given by Cd = 3000 - 2000r + 0.10Y Id = 1000 - 4000rwhere Y is output and r is the expected real interest rate. (a)Find the real interest rate that clears the goods market. Assume that output equals full-employment output.(b)Calculate the amount of saving, investment, and consumption in equilibrium.(c)If a shock to wealth causes desired consumption to decline by 200 (so that the new equation for desired consumption is Cd = 2800 - 2000r + 0.10Y), find the equilibrium real interest rate, saving, investment, and consumption.
What will be an ideal response?
| (a) | Sd = Y - Cd - G = 5000 - [3000 - 2000r + 0.10Y] - 1000 = 500 + 2000r. |
| (b) | Plugging this value of r into the equations for consumption and investment gives |
| (c) | Follow the same steps as above with the new equation for desired consumption to get: |
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