Suppose the goods market is represented by the following equations:
C=180+0.7Yd
I=100-18i+.1Y
Y=C+I+G
Yd=Y-T
T=400
G=400
a. Solve for the equilibrium level of output. That is obtain an equation with Y on the left hand side and all other variables on the right hand side.
b. Calculate the level of output that occurs when the interest rate is: 5%, 10%, 15%, and 20% (i.e., i=5 and so on). On a separate piece of paper, plot these 4 combinations of i and Y. What does this curve represent?
c. As the goods market adjusts to these increases in i, what happens to consumption, savings, and investment? Briefly explain why each variable changes.
d. Calculate the equilibrium level of output when i=8% (let i=8). Where is this point on your graph? Assume that i continues to be 8%. Calculate the equilibrium level of output when G increases by 100 (to 500). What is the size of the money multiplier?
e. What does your analysis in part (d) suggests happens to the IS Curve depicted in your graph? Briefly explain.