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Consider an economy where the various components of expenditure follow these equations: C = 10 + 0.81% I = 500 G = 100 X =
Consider an economy where the various components of expenditure follow these equations: C = 10 + 0.81% I = 500 G = 100 X = 300 M =U.1Y T= 0.1Y c. Calculate the equilibrium level of GDP in this economy. highlighting what are the values of the Keynesian multiplier and the autonomous components of expenditure. (10 marks) Now assume that aggregate investment is also sensitive to movements of the interest rate: I = 500 2,000r The money supply is equal to 1.000 and money demand satises the following equation: Md = 2V 8,00\"?- d. Solve for the equilibrium levels of output and the interest rate. Explain why the equilibrium level of output is lower than the one obtained in (c). (20 marks) e. Suppose that the government increases the tax rate to 0.15. Calculate the equilibrium effects of this policy and provide an explanation with the help of appropriate diagrams. (10 marks) f. Now assume that the price level can adjust. Using appropriate diagrams. explain the short- run impact of the policy introduced in (v) on aggregate output and the price level and the mechanisms by which output will eventually return to its natural level. (20 marks)
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