Assume that real output is fixed at Y ¯ = 300, consumption is fixed at C ¯ = 200, government spending is fixed at G ¯ = 30.
Assume that the Investment function takes the following form I(r) = 75−r, where r is given in percent terms (i.e., r = 2 signifies an interest rate of 2%).
Assume that the quantity equation of money holds M · V = P · Y and the velocity of money is constant V ¯ .
a) If the money supply increases by %3, by what percentage rate do prices change? That is, what is the inflation rate?
(b) What is the real rate of investment r in this economy? What is the investment level I?
(c) What is the nominal interest rate i?
(d) If government spending G increases to 35, what happens to the real rate of investment r, investment I, and the nominal interest rate i?