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Question 4. (20 points) Suppose in a closed economy, its national output can be described as the following equations, 0 Y = C + I
Question 4. (20 points) Suppose in a closed economy, its national output can be described as the following equations, 0 Y = C + I + G; national output or GDP. 0 C = 20 + 0.8 (YT); consumption, marginal propensity to consume MPC = 0.8. 0 I = 15; investment (as a given value here). I G = 100; government spending. I T = 100; tax. (1) What is the equilibrium level of income according to the Keynesian Cross? (2) Suppose, we now have some more information. For example, investment (I) is a function of interest rate (r), as below. I Y = C + I + G; national output or GDP. C = 20 + 0.8 (YT); consumption, marginal propensity to consume MPC = 0.75. I = 40 - 5 * r; investment which is a negative function of real interest rate (r). (M/P)\"l = Y - 35 * r; real money demand which is adjusted by price level (ination). G = 100; government spending. T = 100; tax. M = 1,100; money supply. P = 5; price level. Using the information above, try to derive the IS curve. (3) Use the same equations, now try to derive the LM curve. (4) What is the equilibrium level of national output (Y) and the equilibrium interest rate (r)
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