Consider an economy described by the following. C- = 3.25 trillion
I- = 1.3 trillion
G- = 3.5 trillion
T- = 3.0 trillion
NX- = -1.0 trillion
f- = 1%
mpc = 0.75
d = 0.3 (trillion per 1% change)
x= 0.1 (trillion per 1% change)
λ = 1
r- = 1%
a. Derive expressions for the MP curve and AD curve.
b. Assume that pi = 1%. What is the real interest rate, equilibrium rate of output, consumption, planned investment, and net exports?
c. Suppose the Fed increases r- to r- = 2%. Calculate what happens to the real interest rate, equilibrium level of output, consumption, planned investment and net exports.
d. Considering that output, consumption, planned investment, and net exports all decreased in part (c), why might the Fed chose to increase r-?