THE PRODUCT MARKET
Z=C+I+G
C=a+bYd
I=Io+I1Y-I2i
Equilibrium condition, Y=Z, where Y represents output and Z is aggregate spending.
THE FINANCIAL MARKET
Md=MT+Mp
MT=MTo+MT1Y
Mp=Mpo-Mp1i
Ms=500
a=100, b=0.7, Io=150, I1=0.1, I2=1500, Go=150, To=90, T1=0.08,
solve for:
i)Equilibrium real output Y and interest rate, r.
ii)Determine the amount of national saving.
iii)What is equilibrium value of consumption spending C, investment spending I, speculative money demand Mp.
iv)Is the economy operating below national level of output. If yes, then reduce money supply by 50% and reduce government spending 25%.
If no, then raise money supply by 50% and government spending by 25%.
Determine the equilibrium income.
How close is this new value to the national level of output.
Represent your answer in (i) and (iv) in a graph.