The following graph shows the Keynesian cross diagram for the hypothetical economy of Muji. Assume potential output equals $2,400 billion.
Suppose the following equations describe the economy of Muji:
C = 256 + 0.75 (Y-T) - 100r
Ip = 250 - 2,000r
G = 50
NX = 0
T = 40
Initial Real Interest Rate = 0.06 = 6%
Inflation Rate = 6%
3.5. The Central Bank of Muji wishes to eliminate the recessionary gap through expansionary monetary policy. The central bank can do so by stimulating consumption and planned investment. The central bank must lower the REAL interest rate by ____ in order to eliminate the output gap. Assume the inflation rate is constant. Write this number on a piece of paper because you will need the information for a subsequent question.
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