1. C = 500 + 0.75Y, I = 1,000,G = 1,600, X = 300, M = 400. Calculate the equilibrium values of C and S. Is there any evidence of "crowding out"? Explain.
2. Recall that for equilibrium, AD = AS, Suppose AD and AS , both functions of
real GDP (Y) and the price level (P), are known to be:
AD : Y = 3000 - 200P
AS : Y = 1500 + 100P
i) The equilibrium GDP and P
ii) V if the money supply = 2,500
iii) The equilibrium rate of interest(i) if money demand Md = 2600-1000i
In order to find the equilibrium C and S, we should first find the equilibrium GDP (denoted by Y). This is done by solving the following equation:
Y = C +I + G + (X-M)
Plugging the values we have for C, I, etc, we get:
Y = 500 + 0.75Y + 1000 + 1600 + (300 - 400)
Solving for Y:
0.25Y = 3000
Y = 12000
So the equilibrium GDP is 12,000. Now, in order to find C, we simply plug this value into the consumption equation:
C = 500 + 0.75Y
C = 500 + 0.75*12000 = 9,500
Finally, savings (S) is simply calculated as:
S = Y - C = 12000 - ...
This posting shows the interest rate and other factors.