Desired consumption is Cd = 20 + 0.5Y – 0.1r and desired investment is Id =...

Desired consumption is C^d = 20 + 0.5Y – 0.1r and desired investment is I^d = 30 – 1.5r. G is 15 and Y is 100. Real money demand is M^d/P = 5 + Y – 0.3i. Provide economic reasons to interpret:

(a) the consumption function with respect to its components.

the investment function with respect to its components.

Expert Solution

Rahul Sunny answered 6 months ago

Suppose desired consumption and desired investment are Cd = 300 + 0.75(Y − T) − 300r T = 100 + 0.2Y Id = 200 − 200r

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Consumption = C, Taxes = T, Investment Demand = ID, Disposable Income = Y-T, Govt. Purchases of Goods and Services = G Aggregate Expenditure = AE, the MPC is constant, Foreign trade is zero. In case you care, autonomous consumption = $40. AS = Y T Y-T C ID G AE d(Inventories) $9,500 $200 $8,875 $285 $400 $9.900 $200 $9,255 $285 $400 $10,300 $200 $285 $400 $10,700 $200 $285 $400 $11,100 $200 $285 $400 $11,500 $200 $285 $400...

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