2. For the economy described below: C = 2800 + 0.5(Y − T) − 8000r I = 2200 − 8000r P G = 2200 NX = 0 T = 3500 a)Potential output, Y*, equals 8980. What real interest rate should the Reserve Bank set to bring the economy to full employment? You may take as given that the multiplier for this economy is 2. b)Repeat part (a) for the case in which potential output Y* = 8020.

c)* Show that the real interest rate you found in part (a) sets national saving at potential output, defined as Y* − C − G, equal to planned investment, I . This result shows that the real interest rate must be consistent with equilibrium in the market for saving when the economy is at full employment. LO 10.5 HARD P