An economy is described by the following equations:
C = 1000 + 0.6(Y-T) – 1500r
Ip = 700 – 1500r
G = 1700
NX = 100
T = 900
Y* = 6650
The real interest rate, expressed as a decimal, is 0.05.
1) Find a numerical equation relating planned aggregate expenditure to output.
2) Using a table or algebra, solve for short-run equilibrium output.
3) Show your results graphically using Keynesian-cross diagram.
4) What real interest rate should the Fed set to bring the economy to full employment?
5) What if Y* = 6275? (repeat 4)