Desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G, and desired investment is Id = 100 - 500r. Real money demand is Md/P = Y - 2000i. Other variables are ?e = 0.05, G = 200, 
= 1000, and M = 2100.(a)Find the equilibrium values of the real interest rate, consumption, investment, and the price level.(b)Suppose the money supply increases to 2800. Find the equilibrium values of the real interest rate, consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged.)
What will be an ideal response?
| (a) | Use the equation Y = Cd + Id + G = 300 + 0.8Y - 1000r, so 0.2 Y = 300 - 1000r, so Y = 1500 - |
To find the price level, use the equation M/P = L and plug the values in to get 2100/P = 1000 - 2000(0.1 + 0.05) = 700, so P = 3.
| (b) | The increase in the money supply to 2800 does not change anything except the price level. The |
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