In a certain economy, the components of planned spending are given by: C = 500 +

Question

In a certain economy, the components of planned spending are given by:

C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150

Given the information about the economy above, what would be the impact on short-run equilibrium output of a one-percentage-point increase in the real interest rate, assuming that the multiplier is equal to 5?

Short-run equilibrium output would increase by 35 units. Short-run equilibrium output would decrease by 700 units. Short-run equilibrium output would decrease by 35 units. Short-run equilibrium output would decrease by 7 units.

Explanation / Answer

change in output = -5*700*0.01

Short-run equilibrium output would decrease by 35 units.

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