(A)Consider Utopia's economy with a desired linear consumption function with the peculiarity that they do not like...
Question:
(A)Consider Utopia's economy with a desired linear consumption function with the peculiarity that they do not like the dictatorial government spending. Thus their consumption declines when their government starts spending more. ( G=Govt expenditure, Y=Disposable Income, i=nominal interest rate, r=real interest rate, P=Price level, π = expected inflation rate).
Consumption function as
C(d) = 100 + 0.8Y -500r-0.5G and desired investment function as I(d) = 100 -500r
Their real money demand is
M(d)/P = Y- 2000i
Other variables are π=0.05, G = 200, Y = 1000 and M= 2100
(a) Find the equilibrium values of the real interest rate, consumption, investment, and the price level.
(b) In the classical model, analyse the effects of an increase in the government spending, financed by selling bonds to the public, on output, employment and the price level.
Managerial Accounting An Introduction to Concepts Methods and Uses
ISBN: 978-0324639766
10th Edition
Authors: Michael W. Maher, Clyde P. Stickney, Roman L. Weil