For the economy described below 2500 09Y 220010000r 2200

For the economy described below: = 2.500 + 0.9(Y- = 2,200-10,000r = 2,200 =0 = 3.500 -10,000r ,p NX a. Suppose that potential output Y\" equals 27,500. What real interest rate should the Fed set to bring the economy to full employment? You may take as given that the multiplier for this economy is 10 Instruction: Enter your response as an integer value. Real rate of interest: b. Suppose that potential output Y\" equals 23,500. What real interest rate should the Fed set to bring the economy to full employment? You may take as given that the multiplier for this economy is 10. nstruction: Enter your response as an integer value. Real rate of interest: c. Show that the real interest rate determined in part a sets national saving equal to planned investment when the economy is at potential output. This result shows that the real interest rate must be consistent with equilibrium in the market for saving when the economy is at full employment. nstruction: Enter your response as an integer value. Planned investment/p = National saving S=

Solution

Y = C + I + G+ NX = 2500 + 0.9(Y-3500) - 10000r + 2200 - 10000r + 2200 = 6900 - 20000r + 0.9Y - 3150 = 3750 - 20000r + 0.9Y

So Y = 37500-200000r

a) If Y = 27500 then 200000r = 10000 so r = 0.05 = 5%

b) If Y = 23500 then 200000r = 14000 so r = 0.07 = 7%

c) I = 2200 - 10000*.05 = 2200 - 500 = 1700 and C = 2500 + 0.9*(27500-3500) - 10000*0.05 = 2500 + 21600 - 500 = 23600

National Saving = Y - C - G = 27500 - 23600 - 2200 = 1700