Question

Plus the following problem:

Consider the following economy:

Goods Market Equilibrium: Y = C + I + G
Consumption function: C = 120 + .6(Y-T)
Investment Function: I = 250 - 10r
Fiscal Policy: G = 200, T = 200
Monetary Policy: Target r = 5

A. Find equilibrium Y, and assume for the following questions that this is also the long-run output equilibrium.

B. There is a recession and I' = 50 - 10r. The government intervenes with an expansionary fiscal policy of G'=300 and T'=100. If the Federal Reserve's goal is to maintain the long-run equilibrium found in part A, what is the new monetary policy target r'?

C. Instead of the recession in part B, assume the economy is at long run equilibrium found in part A, but the government decides to implement an expansionary fiscal policy of G''=250 and T''=150. If the Federal Reserve's goal s to maintain the long-run equilibrium Y found in part A, what is the new monetary policy target r''?

Answer 1