An economy has full-employment output of 1000. Desired consumption and desired investment are
Cd = 200 + 0.8(Y -T) - 500r;
Id = 200 - 500r.
Government purchases are 196 and taxes are
T = 20 + 0.25K
Money demand is
Md/P = 0.5Y- 250(r + πe),
where the expected rate of inflation πe = 0.10. The nominal supply of money M = 9890.
a. What are the general equilibrium values of the real interest rate, price level, consumption, and investment?
b. Suppose that government purchases are increased to G = 216. What are the new general equilibrium values of the real interest rate, the price level, consumption, and investment? 4.