In a certain economy, the components of aggregate spending are given by: C = 60 + 0.6(Y - T) - 1,000r
I = 200 - 1,000r
G = 200
NX = 50
T = 100
Given the information about the economy above, what would be the impact on short-run equilibrium output of a one-percentage-point increase in the real interest rate from 4 percent to 5 percent?

Question

Quizplus · Accepted Answer

Recall that Y = C + I + G + NX. Substituting into the equation gives Y = 60 + 0.6(Y - 100) - 1,000r + 200 - 1,000r + 200 + 50. Collecting terms yields Y = [450 -2,000r] + 0.6Y. At a real interest rate of 4 percent, we get Y = [450 -2,000(.04)] + 0.6Y or Y = 370 + 0.6Y. Solving for Y, we get Y - .6Y = 370 or 0.4Y = 370 or Y = 925. At a real interest rate of 5 percent, we get Y = [450 -2,000(.05)] + 0.6Y or Y = 350 + 0.6Y. Solving for Y, we get Y - .6Y = 350 or 0.4Y = 350 or Y = 875. So the short-run equilibrium changes from 925 to 875, a decrease by 50 units.

In a Certain Economy, the Components of Aggregate Spending Are