Consider an economy in which taxes, planned investment, government spending on goods and services, and net exports are autonomous, but consumption and planned investment change as the interest rate changes. You are given the following information concerning autonomous consumption, the marginal propensity to consume, planned investment, government purchases of goods and services, and net exports:
Ca = 1,500 - 20rc = 0.6Ip = 2,450 - 60r
G = 1,980 NX = -200 T = 1,750
(a) Compute the value of the marginal propensity to save.
(b) Compute the amounts of autonomous planned spending, Ap, when the interest rate equals 0, 2, 4, and 6.
(c) Compute the equilibrium levels of income when the interest rate equals 0, 2, 4, and 6. Graph the IS curve.
(d) Suppose that policymakers decide to reduce the number of troops in Afghanistan, which results in a reduction of government spending of $80 billion. Compute the new amounts of autonomous spending, Ap, when the interest rate equals 0, 2, 4, and 6.
(e) Compute the equilibrium levels of income when the interest rate equals 0, 2, 4, and 6 and graph the new IS curve.
(f) Suppose that a government expansion of health care causes its spending to increase by $160 billion from $1,960 to $2,120. Compute the new amounts of autonomous spending, Ap, when the interest rate equals 0, 2, 4, and 6.
(g) Compute the equilibrium levels of income when the interest rate equals 0, 2, 4, and 6 and graph the new IS curve.
(h) Suppose that initially the interest rate equals 4 and the economy is in equilibrium at natural real GDP, which equals 10,900. If monetary policymakers want to maintain income at natural real GDP, explain by how much they will change the interest rate as a result of either the Afghanistan troop reduction or the expanded health care.