Problems & Applications (Ch 21) 11. Problems and Applications Q11 Consider an ec
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Problems & Applications (Ch 21) 11. Problems and Applications Q11 Consider an economy described by the following equations: C-150+0.6(Y-T) 1=500-50r G 200 T-150 where Y is GDP, C is consumption,I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at the natural rate of output), GDP would be $1.400 Identify the equation(s) each of the following stetements describes. Check all thet apply Statement 1 is an autonomous amount, independent of other factors. It is a function of disposable income it depends on the interest rate. The marginal propensity to consume in this economy is Suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 2 percent, so r when the interest rate is 2 percent, GDP is S GDP at an interest ful-employment le 2 rate of 2 percent is vel the in government purchases by fs- 1 would restore GDP to the full-employment level. Assuming no change in monetery policy (Note: Assume that this change in fiscal policy has no crowding-out effect.) , - the interest rate by[ percent would restore GDP to the full-employment level. in Assuming no change in fiscal policy, Grade it Now Save & Continue Continue without savingExplanation / Answer
1) There is a spending (consumption) level even when there is no output that is generally filed with past saving or borrowing. Here it is Government spending as G.
2) Consumption gets depended majorly on disposable income. Thus C is answer.
3) Investment depends upon interest. I is answer.
4) Marginal propensity to consume is a measurement that tells that with one dollar increased in consumption how much of that 1 dollar will be consumed. It is a coefficient in Consumption function of (Y-T) that is 0.6. Thus MPC is 0.6.
5) GDP = C+ I + G = 150+0.6(Y-150)+500-50(0.02)+200
Y = 0.6Y + 759
Y = $1897.5
6) As GDP at 2% interest rate is more than $1400 , it is more than full employment level.
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