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Consider the following Keynesian open economy: Desired consumption C = 200 + 0.6(Y-T) - 200r Desired investment I = 300 - 300r Government purchases G
Consider the following Keynesian open economy:
Desired consumption C = 200 + 0.6(Y-T) - 200r
Desired investment I = 300 - 300r
Government purchases G = 152
Taxes T = 20 + 0.2Y
Net exports NX = 150 - 0.08Y - 500r
Real money demand L = 0.5Y - 200i
Money supply M = 924
Full-employment output Y = 1000
Expected inflation pe= 0
- What are the general equilibrium (that is, long-run) values of output, the real interest rate, consumption, investments, net exports, and the price level?
- Starting from full employment, government purchases are increased by 62, to 214. What are the effects of this change on output, the real interest rate, consumption, investment, net exports, and the price level in the short run? In the long run?
- With government purchases at their initial value, net exports increase by 62 at any income and real interest rate so that NX = 212 - 0.08Y - 500r. What are the effects of this change on output, the real interest rate, consumption, investment, net exports, and the price level in the short run? In the long run?
- Compare your answer to that of part (2).
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