Let: C = consumption I = investment spending G = government spending Tx = tax revenue Yd = after-tax income MS = money supply MD = money demand r = interest rate Assume for a given closed economy: (i) Consumers spend $200 billion plus 80% of after-tax income, or C=200+0.8 Yd (ii) Investment demand varies inversely with the interest rate, such that I= 500-2000r (iii) Currently government spending and taxes are both $250 billion, or G=250 and Tx=250, (iv) The total money demand or liquidity preference schedule for this economy is an inverse function of the rate of interest and is given by the equation MD=850-1000r (v) The required reserve ratio for banks in this economy is 20%. No bank holds excess reserves, and everybody keeps their money in the bank. The total of reserves in the banks is $150 billion. Answer the following questions given the information above. a) What is the total money supply? b) What is the equilibrium interest rate? c) What is the equilibrium level of national income?
Let: C = consumption I = investment spending G = government spending Tx = tax revenue Yd = after-tax income MS = money supply MD = money
Answer the following questions given the information above. a) What is the total money supply? b) What is the equilibrium interest rate? c) What is the equilibrium level of national income?
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