ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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A Keynesian economy is described by the following equations.
- Consumption Cd = 250 + 0.5(Y - T) - 250r
- Investment Id = 250 - 250r
- Government purchases G = 300
- Government taxes T = 300
- Real money demand L = 0.5Y - 500r + πe
- Money supply M = 3000
- Full-employment output Y = 1250
- Expected inflation πe = 0
(HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id)
- Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.
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