Consider an economy described by the following 4. (16 points) Monetary Policy& T
ID: 1126053 • Letter: C
Question
Consider an economy described by the following 4. (16 points) Monetary Policy& The Federal Reserve: equations Consumption :C 15,000+.6(Y -T) -55,000r Planned Investment : IP 8,500 35,000r Government Purchases G 7,500 Net Exports : NX = 1,800 Net Tazes T 8,000 Potential OutputY 40,000 Where r equals the real interest rate. (o) (3 pointe) Find a numerical equation relating planned aggregate expenditure to output and the real interest rate. (b) (2 points) Suppose that the real interest rate is currently r = 0.10 Calculate short run equilibrium output for this economy. (c) (2 points) Calculate the output gap in this economy. Is it recessionary or expansionary? (d) (2 points) Illustrate this economy's short-run equilibrium in a Keynesian-cross diagram. You may assume that r = 0.10.Explanation / Answer
a) Aggregrate expenditure = AE = C+I+G+NX
AE = 15000 + 0.6 (Y-T) -55000r + 8500 - 35000r + 7500 + 1800
AE = 0.6 (40000 - 8000) - 55000r - 35000r + 32800
AE = 19200 - 90000r + 32800
90000r = 52000 - AE
r = (52000 - AE)/ 90000
b) Short run equillibrium output = Y
r = 0.1
Y = C+I+G+NX
Y = 15000 + 0.6 (Y-T) -55000r + 8500 - 35000r + 7500 + 1800
Y = 0.6 (Y - 8000) - 55000r - 35000r + 32800
Y = 0.6 (Y - 8000) - 90000r + 32800
Y = 0.6Y - 4800 - 90000x0.1 + 32800
Y-0.6Y = 28000 - 9000
0.4Y = 19000
Y = 47500
c) Output Gap = Y - Y* = 47500 - 40000
Output Gap = 7500
As the number is positive it is a inflationary gap