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Calculate the change in the equilibrium interest rate

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Consider the economy described in chapter 3 (a closed economy, the factors of production are in fixed supply and fully used, prices adjust to balance supply and demand, etc). Consumption is a linear function of disposable income and the marginal propensity to consume is 0.6. The investment function is: I = 100 - 80 r (where I is investment and r is the real interest rate).

(a) Explain how an increase in output (due to technological progress) affects the equilibrium interest rate.

(b) Calculate the change in the equilibrium interest rate if technological progress increases output by 20 units. (for this question the professor said we have to use the change in consumption and well be taking a derivative)

Reference no: EM131395466

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