5. Desired consumption is C^d = 100 + 0.81 - 500r - 0.5G, and desired investment

Question

5. Desired consumption is C^d = 100 + 0.81 - 500r - 0.5G, and desired investment is I^d 100 - 500r. Real money demand is M^d/P = Y - 2000i. Other variables are pi^e = 0.05, G = 200, Y = 1000, and M = 2100. (a) Find the general equilibrium values of the real interest rate, consumption, investment, and the price level. (b) Suppose the money supply increases to 2800. Find the general equilibrium values of the real interest rate, consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged.)

Explanation / Answer

Answer

A.)))

In equilibrium , Y = C + I + G

Substituting values of C and I in the above equation ,

Y = 100 + 0.8Y

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