Question

C = 2180 – 20r + 0.6(Y – T)

I = 2400 – 60r

(M^d/P) = 0.25Y – 50r

(M^S/P) = 3000

G = 2000, T = 1800, NX = 300

Planned Expenditure = 5800 + 0.6Y - 80r

IS curve: Y = 14500 - 20r

LM curve: Y = 12000 + 200r

4. Determine the real interest rate and real GDP at which there is no unintended change in inventory and the money market is in equilibrium.

5. Suppose the G increases by $500. How will this affect r and how much private spending will be crowded out?

6. In the economy described above, a candidate for office proposes to increase government purchase by $100 and pay for it by raising taxes (T) by the same amount. Calculate real GDP and real interest rate by incorporating these changes.