Unformatted text preview: n each case, plug everything except the unknown interest rate into the
equation:
. Solve for the interest rate. Finally, calculate Consumption, using ;
and Investment, using and the interest rate, . Government spending and the nominal money supply
are held constant along a given AD curve. The tax rate is also constant, tax receipts are endogenous
rising with income as Investment rises in response to lower interest rates as the real money supply
increases. It follows that the Budget surplus increases as production, income, and expenditure increase.
Check that the national income identity (closed economy) holds:
. 125
120
100
90
75
72
60 360,000 2,880
360,000 3,000
360,000
360,000
360,000
360,000
360,000 6,000 7,280
7,400 5.92%
5.80% 4,828
4,900 412
460 10,400 2.80% 6,700 1,660 2,040
2,040
2,040
2,040
2,040
2,040
2,040 220
190 632
650 +560 1,100 3. On the Supply Side of the model, wagesetting and pricesetting equations yield an equation for P as a
function of Y; rather than Y as a function of P, as in the AD curve. Use the following...
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 Fall '08
 Aravantanos
 Economics, Inflation, Supply And Demand, AD curve

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