An economy has full-employment output of 6000. Government purchases are 1680. Desired consumption and desired investment...

An economy has full-employment output of 6000. Government purchases are 1680. Desired consumption

and desired investment is given by

?? ? Cd= 3000-1500?+0.2?

?? ? Id= 500-3250?

where Y is output and r is the real interest rate.

a. (5 Points)What is the real interest rate that clears the goods market? Assume that output equals full employment

output.

b. (3 Points) Compute the amount of saving, investment and consumption in equilibrium.

c. (4 Points) What would happen to the equilibrium real interest rate if government purchases fell to

1600? Increase or decrease? Explain the intuition for the change. A diagram may be useful here.

Expert Solution

Rahul Sunny answered 2 years ago

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