The following are from Country A:

a. Write the equation for the aggregate demand curve. (Hint: Find the equations describing the goods market and asset market equilibria. Use these two equations to eliminate the real interest rate. For any given price level, the equation of the aggregate demand curve gives the level of output that satisfies both goods market and asset market equilibria.)

b. Suppose that \(P=10\). What are the short-run equilibrium values of output, the real interest rate, consumption, and investment?

c. What are the long-run equilibrium values of output, the real interest rate, consumption, investment, and the price level?

d. Consider another country, Country B, which has the same equations as Country A except that its desired investment equation is \(I^{d}=15-55 r\). Suppose that the short-run price level is the same as in part (b); i.e., \(P=10\). What are the short-run equilibrium values of output, the real interest rate, consumption, and investment of Country B? Now, assume that the governments of Country A and Country B increase their purchases to 40 . Comparing their results, which country's fiscal policy is more effective in raising output? Explain your answer in relation to their investment equations.

Transcribed Image Text:

Desired consumption C = 10 + 0.75(Y - T) - 80r Desired investment Government purchases Taxes Real money demand Money supply Full employment Id = 15-20r G = 20 T = 20 L = 0.8Y80r M = 320 Y = 64 output