Question: Autonomous Consumption = 2.25 trillion
Auntonomous Investments = 1.3 trillion
Government Purchases = 3.6 trillion
Taxes = 3 trillion
Additional cost of borrowing due to financial fricitons = 1
marginal propensity to consume = 0.75
sensitivity of investments to the cost of borrowing = 0.3
Monetary policy curve = r= 1+ actual inflation ( that is r(bar)=1 and lambda=1)
We also know that the AS curve is: p=pe+0.5(Y-Y*)
pe= expected inflation= 4.5
Y= current output
Y*= potential output = 7 trillion
(a) What is the short-run equilibrium level of output (Y)?
(b) What is the short-run equilibrium level of inflation (p)?
(c) What is the long-run equilibrium level of output (Y)?
(d) What is the long-run equilibrium level of inflation (p)?