Find the long-run values of r-c-i-p and v

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Reference no: EM13233209

Consider a closed economy that can be represented by thefollowing equations:

C(r) = 116+0.7(Y -T)-150r

I(r) = 25 - 625r

G =300 (6)

T = 300

(Md /P) = Y /(80 + 50r)

For parts (a) and (b) assume M = 100 and for parts (a) and (c)assume Y = 1000

(a) Find the long-run values of r, C, I, P and V (velocity). Showyour calculations.

(b) An oil shock reduces full employment output to Y = 974.16. Usean IS-LM diagram to explain what is happening and then calculatethe long-run values of r, C, I, P and V .

(c) Ignore part (b) and assume that the government decides toreduce spending and taxes and so G = T = 274.16. What value mustthe central bank set for M in order to keep the price levelconstant following the government downsizing? Illustrate what ishappening with an IS-LM diagram and calculate the new values of r,C, I, P and V .

Reference no: EM13233209

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