3 .00 points The following set of equations describe an economy C 14,000 08Y-T)-

Question

3 .00 points The following set of equations describe an economy C 14,000 08Y-T)-40,000 IP = 10,000 _ 25,000 G =7,800 = 1,800 T =8,000 = 90,500 o. Find a numerical equation reloting planned aggregate expenditure to output and to the real interest rate. Instruction: Enter the value for mpe rounded to two decimal places PAE- b. At what value should the Fed set the real interest rate to eliminate any output gap? (Hint Set output Yequal to the value of potential output given above in the equation you found in part a. Then solve for the real interest rate that also sets planned Click to select) (Click to select) r aggrogate expenditure equal to potential output) Instruction: Enter your response as an intager value Real rate of interest

Explanation / Answer

(a)

PAE = C + Ip + G + NX

PAE = 14,000 + 0.8(Y - 8,000) - 40,000r + 10,000 - 25,000r + 7,800 + 1,800

PAE = 33,600 + 0.8Y - 6,400 - 65,000r

PAE = 27,200 - 65,000r + 0.80Y

(b)

In equilibrium, PAE = Y

Y = 27,200 - 65,000r + 0.80Y

0.2Y = 27,200 - 65,000r

Y = 136,000 - 325,000r

When Y = Y* = 90,500,

136,000 - 325,000r = 90,500

325,000r = 45,500

r = 0.14

r = 14%

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