In a certain economy, the components of aggregate spending are given by: C = 100 + 0.9(Y - T) - 500r
I = 150 - 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 decrease in the real interest rate from 6 percent to 5 percent?

Question

Quizplus · Accepted Answer

Recall that Y = C + I + G + NX. Substituting into the equation gives Y = 100 + 0.9(Y - 100) - 500r + 150 - 1,000r + 200 + 50. Collecting terms yields Y= [410 -1,500r] + 0.9Y. At a real interest rate of 6 percent, we get Y = [410 -1,500(.06)] + 0.9Y or Y = 320 + 0.9Y. Solving for Y, we get Y - .9Y = 320 or 0.1Y = 320 or Y = 3,200. At a real interest rate of 5 percent, we get Y = [410 -1,500(.05)] + 0.9Y or Y = 335 + 0.9Y. Solving for Y, we get Y - .9Y = 335 or 0.1Y = 335 or Y = 3,350. So the short-run equilibrium changes from 3,200 to 3,350, an increase by 150 units.

In a Certain Economy, the Components of Aggregate Spending Are