Suppose the following equations describe the relationship between the long-run shares of spending in GDP and the interest rate (R), measured in decimal fractions (that is, R = 0.05 means that the interest rate is 5 percent).

Equations: C/Y* = 0.7 0.2R

I/Y* = 0.2 0.8R

NX/Y* = 0.1 0.95

G/Y* =0 .2

a) Use algebra to determine the values of the interest rate and the long-run shares of spending in GDP.

b) Do the calculations again for a long-run government share of 17 percent rather than 20 percent.

c) Suppose that the share of government purchases changes from 20 percent to 17 percent. Describe, in words, the mechanism by which each of the other shares changes.