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Consider an extension of the model from the lecture, in which aggregate consumption decreases in the real interest rate: C = 100 + 0.25(Y

 

Consider an extension of the model from the lecture, in which aggregate consumption decreases in the real interest rate: C = 100 + 0.25(Y - T) - 1000r. Aggregate investments are given by I = io 1000r. Suppose the government tries to stimulate investments into green energy by subsidizing investments into solar panels. Assume the subsidy raises firms' desired investments, shifting the investment demand curve by Aio = 50. 12 Compute the change in the equilibrium interest rate Ar induced by the subsidy. 13 Compute the corresponding change in the equilibrium level of investments AI induced by the subsidy.

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