007 Aggregate Demand, Aggregate Supply Exercise

In each case plug everything except the unknown

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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, wage-setting and price-setting 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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