Suppose the economy has the following parameters:
Autonomous consumption is set at 800 and the marginal propensity to consume isa= 0.8
Autonomous investment is 2000.
In the short run, an increase in interest rate (r) by 1 percentage point reduces consumption and investment by 500 units each; i.e..
There is no government and no exchange with the rest of the world.
a) Write down the consumption function, the investment function and the planned aggregate expenditure function.
b) Write down the equation representing the economy at its equilibrium. You can now calculate the equilibrium values for output, consumption, and investment assuming that the central bank fixes the interest rate at 5%. What is the value of the Keynesian multiplier?