The following equations describe the economy in Country A in 2020.

ConsumptionC = 1000 + 0.6Yd - 400r

InvestmentI = 250 - 500r

Government spendingG = 500

ExportsX = 1500

ImportsM = 500 + 0.4Y

Income tax ratet = 0.2

Money demandMd = 1000 - 250i

Money supplyMs = 985

Expected inflation ratee = 0.05

where Yd is disposable income, i is nominal interest rate, and r is the real interest rate.

a. What is the equilibrium nominal interest rate in Country A in 2020? Explain your calculations.

b. What is the equilibrium real interest rate in Country A in 2020? Explain your calculations.

c. What is the equilibrium output in Country A in 2020? Explain your calculations.

d. The final term in the equation describing investment, 500r, implies that a 1 percent (0.01) increase in the real interest rate reduces investment spending by 500(0.01) = 5 units. Similarly, the final term in the equation describing consumption, 400r, implies that a 1 percent (0.01) increase in the real interest rate reduces consumption spending by 400(0.01) = 4 units.

Briefly explain how the effectiveness of a monetary policy depends on the responsiveness of planned investment towards changes in real interest rate as well as on the responsiveness of consumption spending towards changes in real interest rate.

State the number of words used at the end of your answer.