Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?
Section9.A: The Simple Algebra Of Income Determination And The Multiplier
Problem 4TY
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Question
Suppose the following equations represents a closed economy:
Y= C + I + G
Y = 4000
G = 500
T = 500
C = 500 + 0.7 (Y – T)
I = 1000 – 40r
In this economy, compute the value of consumption (C), private saving, public saving , and national saving. Also, find the equilibrium interest rate (r).
Now suppose that government spending (G) rises (expansionary fiscal policy) to 300. Compute private saving, public saving, and national saving. Also, find the new equilibrium interest rate (r).
In part (b), due to expansionary fiscal policy (increase in government spending), which of the two other components of aggregate demand changes, C or I? Why? (Hint: Note the real interest rate)
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