Answer to Question #100065 in Macroeconomics for Tiffany

Question

3. In Country X, GDP is $400B below the full-employment level of output. Government officials have measured the marginal propensity to consume at 0.75.
b. Say that, for a variety of reasons, the government shows it is not up to the task of conducting fiscal policy. The central bank steps up and does something about it. If a 1% decrease in interest rates leads to an increase in investment of $50B, how should the central bank's interest rate targets change?

Answer 1

If a 1% decrease in interest rate increases investment by $50B. The Central bank should revise its interest rate target by 8% to achieve the full employment level GDP of $400 B