Desired consumption isC^d=20+0.6Y- 1,000r-G, and desired investment isI^d=100 - 600r. Real money demand isM^d/P=Y- 600i. Other variables arep^e=0.02,G=10,=100, andM=116.

(a)Interpret the consumption function with respect to real output and interest rates. Does it make sense? Why? Explain economically one by one: output effects and interest rate effects? As Y goes up, ...? As r goes up, ... (5)

(b)Interpret the investment function with respect to interest rates. Does it make sense? Why? As r goes up, ... (5)

(c)How would you compare the relative sensitivities of C and I to r? Which of the two is more sensitive to fluctuations in interest rates? (5)

d)Find the equilibrium values of the real interest rate, consumption, investment, and the price level. You may wish to use S^d= Y - C^d- G and equate it to I^dto solve for r. Then use r later in the money market. Make sure you obtain desired savings as a positive function of output and real interest rates, plus a constant. (15)