Options for blanks 1.above/below 2.increase/decrease 3.increase /decrease Please

Question

Options for blanks 1.above/below 2.increase/decrease 3.increase /decrease Please Help!! Due12/10/17 Consider an economy described by the following equations: Y=C+I+G C=120+0.8(Y-T) 1=500-50r G= 150 T= 125 where Y is GDP, C is consumption, is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at fu employment (that is, at the natural rate of output), GDP would be $2,850. Identily the equation(s) each of the following statements describes. Check all that apply. CIGT Statement It is an autonomous amount, independent of other factors. oio It is a function of disposable income. It depends on the interest rate

Explanation / Answer

is an atonomous mount independent of factors ----> G, T

is a function of disposable income ----> C

is a function of interest rate ----> I

marginal propensity to consume of the economy is 0.8

when r=3, I = 500-(3 X 50) = 350

now Y = C + I + G

i.e. Y = 120 + 0.8(Y-125) + 350 + 150

i.e. Y = 2600

Thus GDP ar interest rate r=3 is BELOW the full employment level

Assuming no change in monetary policy, INCREASE in government purchases by $50 would restore the GDP to full employment level

Assuming no change in fiscal policy, DECREASE in intereat rate by 1.4% would restore GDP to full employment level

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