Determining the sensitivity of investments

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Reference no: EM131774900

Question: Consider an economy described by the following:

• autonomous consumption=C (bar) = 2.25 trillion

• autonomous investments=I (bar) = 1.3 trillion

• government purchases=G = 3.6 trillion

• taxes=T = 3 trillion

• additional cost of borrowing due to financial frictions=f = 1

• marginal propensity to consume=mpc = 0.75

• sensitivity of investments to the cost of borrowing=d = 0.3

• Monetary policy curve: r = 1 + p (that is: r(bar) = 1 and ? = 1).

(a) Derive the expression for the AD curve. What is its vertical intercept? What is its slope? To answer the following parts, assume inflation is p = 1.

(b) What is the level of output (Y )?

(d) What is the level of consumption (C)?

(e) What is the level of investments (I)?

Reference no: EM131774900

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