Question: Consider an economy described by the following:
• autonomous consumption=C (bar) = 2.25 trillion
• autonomous investments=I (bar) = 1.3 trillion
• government purchases=G = 3.6 trillion
• taxes=T = 3 trillion
• additional cost of borrowing due to financial frictions=f = 1
• marginal propensity to consume=mpc = 0.75
• sensitivity of investments to the cost of borrowing=d = 0.3
• Monetary policy curve: r = 1 + p (that is: r(bar) = 1 and ? = 1).
(a) Derive the expression for the AD curve. What is its vertical intercept? What is its slope? To answer the following parts, assume inflation is p = 1.
(b) What is the level of output (Y )?
(c) What is the real interest rate (r)?
(d) What is the level of consumption (C)?
(e) What is the level of investments (I)?