Consider an economy described by the following equations:
Y= C + I + G
C=100 + 0.75(Y-T)
I= 500-50r
G=125
T=100
a. Explain the meaning of each of these equations.
b. What is the marginal propensity to consume in this economy?
c. Suppose the central bank's policy is to adjust the money supply to maintain the interest rater at 4 percent, so r=4. Solve for GDP. How does It compare to the full-employment level?
d. Assuming no changes in monetary policy, what change in government would restore full employment?
e. Assuming no change in fiscal policy, what change in interest rate would restore full employment?