Consider an economy described by the following:
C̅ = 3.25 trillion
I̅ = 1.3 trillion
G̅ = 3.5 trillion
T̅ = 3.0 trillion
N̅X̅ = -1.0 trillion
f̅ = 1
mpc = 0.75
d = 0.3
x = 0.1
l = 1
r̅ = 1
a. Derive expressions for the MP curve and AD curve.
b. Assume that π = 1. What is the real interest rate, equilibrium level of output, consumption, planned investment, and net exports?
c. Suppose the Bank of Canada increases r̅ to r̅ = 2 Calculate what happens to the real interest rate, equilibrium level of output, consumption, planned investment, and net exports.
d. Considering that output, consumption, planned investment, and net exports all decreased in part (c), why might the Bank choose to increase r̅ ?
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