a. Explain the meaning of each of these equations. b. What is the marginal propensity to consume in this economy? c. Suppose the central bank adjusts the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. How does it compare to the full-employment level?

a. Explain the meaning of each of these equations. b. What is the marginal propensity to consume in this economy? c. Suppose the central bank adjusts the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. How does it compare to the full-employment level?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 11PA

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Question

11. Consider an economy described by the following
equations:
Y =C +I + G
C = 100 + 0.75(Y – T)
I = 500 – 50r
G= 125
T = 100
where Y is GDP, C is consumption, I is investment, G is
government purchases, T is taxes, and r is the interest
rate. If the economy were at full employment (that is,
at its natural level of output), GDP would be 2,000.
a. Explain the meaning of each of these equations.
b. What is the marginal propensity to consume in
this economy?
c. Suppose the central bank adjusts the money
supply to maintain the interest rate at 4 percent, so
r = 4. Solve for GDP. How does it compare to the
full-employment level?
d. Assuming no change in monetary policy, what
change in government purchases would restore
full employment?
e. Assuming no change in fiscal policy, what change
in the interest rate would restore full employment?

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