Aggregate Demand

2. Consider the following components of the Aggregate Demand.

i. Consumption: C=200 + 0.2 (Y-T)

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ii. Investment: I = 100 – 200 i

iii. Government expenditure: G = 100

iv. Tax : T =0

a. How much is the Investment Demand if interest rate is 10%

b. How much is the Aggregate Demand (AD)? (you may express it in terms of Y).

c. Draw a diagram showing AD and Y.

d. How much is the equilibrium output (Y) in the economy? (Use the diagram or solve it using algebra).

e. What is the autonomous consumption multiplier?

f. What is the government expenditure multiplier?

g. What is the tax multiplier?

h. Consider that interest rate increased to 20%. Redo (a), (b), (c) and (d).

i. Draw the IS curve – which is a diagram of i and equilibrium Y.

j. What are the factors that shift the IS curve?. Explain the variable and direction of the shift.

 

3. Assume the monetary policy curve to be r=1.5+0.75 π

b. Calculate the real interest rate (r) when inflation rate (π) is 2%, 3%, and 4%

c. Draw the MP curve

d. Assume that the Fed change the MP curve to r=2.5+0.75 π. Calculate the real interest rate when inflation rate is 2%, 3%, and 4% and draw the new MP curve.

e. Does the new curve represent tightening or loosening of the monetary policy?

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