For the economy described below: = 2,500 + 0.9( Y – T ) – 10,000 r = 2,200 – 10,
ID: 1207837 • Letter: F
Question
For the economy described below:
= 2,500 + 0.9(Y – T) – 10,000r
= 2,200 – 10,000r
= 2,200
= 3,500
a. Suppose that potential output Y* equals 27,500. 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 10.
Instruction: Enter your response as an integer value.
Real rate of interest: % = ?
b. Suppose that potential output Y* equals 23,500. 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 10.
Instruction: Enter your response as an integer value.
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.
Instruction: Enter your response as an integer value.
Planned investment I p = .
National saving S = .
= 2,500 + 0.9(Y – T) – 10,000r
I p= 2,200 – 10,000r
G= 2,200
NX = 0 T= 3,500
Explanation / Answer
a. Genuine rate of interest: 5%.
Clarification:
Y = C + Ip + G +NX
27,500 = 2,500 + 0.9(27,500-3,500) – 10,000r+ 2,200 – 10,000r+ 2200 + 0
27,500= 2,600 + 1180 – 24,000r + 1,800 + 2200
27,500 = 28500– 20,000r
20,000r = 1000
r = 1000/20000 = 0.05 = 5%
b. Genuine rate of interest: 7%.
Clarification:
Y = C + Ip + G +NX
23500= 2,500 + 0.9(23500 –3500) – 10,000r +2,200 – 10,000r + 2200 + 0
23500 = 24900 – 20,000r
20,000r = 1400
r = 1400/20000 = 0.07 = 7%
c. Arranged venture I p = 1700.
National sparing S = 1700.
Clarification:
At the point when genuine interest "r" = 0.05 and Y = Y* = 27500
C = 2,500 + 0.9(27500 – 3500) – 10,000(0.05)
= 23600
Ip = 2200 – 10,000(0.05)
= 1700
S = Y* - C - G
= 27500-23600-2200
= 1700
National sparing equivalents arranged speculation when the economy is in harmony at potential yield, predictable with balance in the business sector for sparing. This lets you know that the common genuine loan cost, the one that sets Y=Y* is additionally the one that sets S=I.