Cnsider an economy in whichc25075y-t i 100-5r and g t

Reference no: EM13376021

Consider an economy in which

C=25+0.75(Y-T), I = 100-5R, and G = T = 100.

Here R denotes the real interest rate (prices are sticky so we don't have to worry about inflation). Assume that R responds to the size of the government's budget deficit. In particular, assume that R = 5 + 0.2(G-T).

(In this question assume that R is written in percent terms. I.e., if the interest rate is 5% then R=5.)

(a) Calculate the equilibrium level of real GDP.

(b) Suppose the government tries to stimulate the economy by increasing G to 150. Taxes do NOT change. Calculate the equilibrium level of real GDP. Does the government succeed in increasing real GDP?

(c) If R didn't depend on the deficit, but was just fixed at R=5, what would happen to output after the fiscal expansion described in part (b)?

(d) In light of your answers to the previous question, provide intuition for the gains to coordinating monetary and fiscal policy during business cycles.(it was Keynesian economy question which you did last night

Reference no: EM13376021

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