For the economy described below c =2.600 + 05lY--12,000r /P 1,800-12.000r G 2.20
ID: 1107551 • Letter: F
Question
For the economy described below c =2.600 + 05lY--12,000r /P 1,800-12.000r G 2.200 NX 0 T3,500 e. Suppose that potential output Y" equals 5.860. 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 Instruction: Enter your response as an integer value Real rate of interest b. Suppose that potential output Y" equals 4.900 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. Instruction: Enter your response as an integer value. Real rate of interest c. Show that the real interest rete determined in pert a sets national saving equal to planned investment when the economy isatExplanation / Answer
a. Y = C + I + G + NX,
Y = 2600 + 0.5 (Y - 3500) - 12000r + 1800 - 12000r + 2200 + 0
Y = 6600 + 0.5Y - 1750 - 24000r.
Y - 0.5Y = 4850 - 24000r.
0.5Y = 4850 - 24000r.
Y = 9700 - 48000r.
Y = Y* = 5860
48000r = 9700 - 5860
r = 3840/48000
r = 0.08 or 8%.
b. Now if Y* = $4900,
4900 = 9700 - 48000r.
48000r = 9700 - 4900
48000r = 4800
r = 4800/48000
r = 0.10 or 10%.
c. NAtional savings = Y - C - G
Y = 5860,
C = 2600 + 0.5 (5860 - 3500) - 12000 * 0.08
C = $2820
G = 2200
NS = 5860 - 2820 - 2200
NS = $840.
Ip = 1800 - 12000 * 0.08
I = $840.
Hence proved both are equal at equilibrium.