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, the immediate impact on aggregate expenditures of a one-percentage-point increase in the real interest rate (r) from 5 percent to 6 percent is ___, and the eventual impact on short-run equilibrium output is ______.

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. Thus, a one-percentage-point increase in r would immediately decrease aggregate expenditure by 2,000 × (0.01) = 20. 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. At a real interest rate of 6 percent, we get Y = [450 -2,000(.06)] + 0.6Y or Y = 330 + 0.6Y. Solving for Y, we get Y - .6Y = 330 or 0.4Y = 330 or Y = 825. So the short-run equilibrium changes from 875 to 825, a decrease by 50 units. In other words, the multiplier in this economy is 2.5 (50/20).

In a Certain Economy, the Components of Aggregate Spending Are