Consider an economy described by the following equations.
Y = C + I + G
G = 1, 200 T = 1,000
C = 475 + 0.8 (Y − T) I = 1, 000 − 100 r.
MD = 2000 - 8000r
MS = 2500
i. Find the equilibrium interest rate and equilibrium output.
ii. Suppose that G decreases to 1, 000, now find the new equilibrium interest rate
and output.
(a)"AE=Y"
AE=1275-0.8y+2200-100r
"R=Y"
1.8r=3475
34.1
"MD=MS"
=2000-800r=2500
2000-2500=800r
-500=800r
=-0.625%
(B) "MD=MS"
2000-800r=1500
2000-1500=800r
500=800r
=0.625%
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