PRINCIPLES OF MACROECONOMICS-CONNECT ACC
7th Edition
ISBN: 9781264088485
Author: Frank
Publisher: MCG
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Question
Chapter 14, Problem 11P
(a)
To determine
Illustrate the value of interest rate if Y is 12,000.
(b)
To determine
Illustrate the value of interest rate if Y is 9,000.
(c)
To determine
Illustrate the value of saving.
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For the economy described below:
C = 2,800 +0.75(YT) - 12,000r
IP = 1,800 12,000r
G = 2,000
NX = 0
T = 3,200
a. Suppose that potential output Y* equals 7,200. What real interest rate should the Fed set to bring the economy to full employment?
You may take as a given that the multiplier for this economy is 4.
Instructions: Enter all your responses as whole numbers.
Real rate of interest: %
b. Suppose that potential output Y* equals 5,280. What real interest rate should the Fed set to bring the economy to full employment?
You may take as given that the multiplier for this economy is 4.
Real rate of interest:
%
c. Show that the real interest rate determined in part a sets national saving equal to planned investment when the economy is at
potential output. This result shows that the real interest rate must be consistent with equilibrium in the market for saving when the
economy is at full employment.
Planned investment /P =
National saving S=
5.Consider an economy in which government purchases, taxes, and net exports are all zero. The consumption function is C = 300 +.75Y and investment spending (I) depends on the rate of interest (r) in the following way:
I = 1,000 - 100r
Find the equilibrium GDP if the Fed makes the rate of interest (a) 2 percent (r=0.02), (b) 5 percent, and (c) 10 percent.
For the economy described below:
C = 2,800+ 0.5(YT) - 8,000r
8,000r
IP = 2,000
G = 2,500
NX-0
T = 3,600
a. Suppose that potential output Y* equals 9,080. What real interest rate should the Fed set to bring the economy to full
employment? You may take as a given that the multiplier for this economy is 2.
Instructions: Enter all your responses as whole numbers.
Real rate of interest: %
b. Suppose that potential output Y' equals 7,800. What real interest rate should the Fed set to bring the economy to full
employment? You may take as given that the multiplier for this economy is 2.
Real rate of interest:
%
c. Show that the real interest rate determined in part a sets national saving equal to planned investment when the economy
is at potential output. This result shows that the real interest rate must be consistent with equilibrium in the market for
saving when the economy is at full employment.
Planned investment P=
National saving S=
Chapter 14 Solutions
PRINCIPLES OF MACROECONOMICS-CONNECT ACC
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