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Explain the dynamic effect by taking "Oil Prices and Inflation" as an example?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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We use the following terminology in this part: aggregate income Y and disposable income Ya (= Y –T), consumption function C(Ya), planned investment function I(r), government spending G, and taxation T = tY where t is the marginal tax rate; r% denotes the real interest rate in the economy. (Note, r is in percentage points, e.g. r = 2 means the interest rate is 2%. When doing calculations, the interest rate should not simply be inserted in decimal form. For example, if r = 2 then I(2) = 124 – 2 = 122.) Consider a hypothetical economy where: • C(Ya) = 12 + 0.75 × (Y – T) • I(r) = 124 – 1 × r • G = 120 • t = 20%