Question
An economy has full-employment output of 5000. Government purchases are 1000. Desired consumption and desired investment are given by Cd = 3000 - 2000r +
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 I d = 1000 - 4000r where Y is output and r is the expected real interest rate. a. Find the real interest rate that clears the goods market at the 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.
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