A classical economy is described by the following equations:
C^d = 500 + 0.5(Y - T) - 100r
I^d = 350 - 100r
L = 0.5Y - 200I
Y = 1850
π^e= 0.05
Government spending and taxes are equal where T = G = 200. The nominal money supply M = 3560.
a. What are the equilibrium values of the real interest rate, the price level, consumption, and investment?
b. Suppose an economic shock increases desired investment by 10, so it is now I^d = 360 - 100r. How does this affect the equilibrium values of the real interest rate, the price level, consumption, and investment?
c. Returning to the initial situation in part (a), suppose an economic shock increases desired consumption by 10, so it is now C^d= 510 + 0.5 (Y - T) - 100r. How does this affect the equilibrium values of the real interest rate, the price level, consumption, and investment?

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The Answer of A classical economy is described by the following equations: C^d = 500 + 0.5(Y - T) - 100r I^d = 350 - 100r L = 0.5Y - 200I Y = 1850 π^e= 0.05 Government spending and taxes are equal where T = G = 200. The nominal money supply M = 3560. a. What are the equilibrium values of the real interest rate, the price level, consumption, and investment? b. Suppose an economic shock increases desired investment by 10, so it is now I^d = 360 - 100r. How does this affect the equilibrium values of the real interest rate, the price level, consumption, and investment? c. Returning to the initial situation in part (a), suppose an economic shock increases desired consumption by 10, so it is now C^d= 510 + 0.5 (Y - T) - 100r. How does this affect the equilibrium values of the real interest rate, the price level, consumption, and investment?

A Classical Economy Is Described by the Following Equations