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What is the marginal propensity to consume in economy

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Reference no: EM132506451

Consider an economy described by the following equations:

= + +

= 100 + 0.75( - ) = 500 - 50

= 125

= 100

Where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at its natural rate), GDP would be 2,000.

  • Explain the meaning of each of these equations.
  • What is the marginal propensity to consume in this economy?
  • Suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 4 percent, so r = 4. Solve for GDP. How does it compare to the full-employment level?
  • Assume no change in monetary policy, what change in government purchases would restore full employment?
  • Assuming no change in fiscal policy, what change in the interest rate would restore full employment?

Reference no: EM132506451

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