For the economy described in Problem 2 above, suppose that potential output Y* equals 12,000. (L02)
a. 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 5.
b. Repeat part a for the case in which potential output Y* equals 9,000.
c.*Show that the real interest rate you found 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.