In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150
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, assuming that the multiplier is equal to 5?
A) Short-run equilibrium output would increase by 35 units.
B) Short-run equilibrium output would decrease by 700 units.
C) Short-run equilibrium output would decrease by 35 units.
D) Short-run equilibrium output would decrease by 7 units.

Question

Quizplus · Accepted Answer

To find the impact of a one-percentage-point increase in the real interest rate, we need to determine the new level of investment (Ip) and consumption (C) and then find the new equilibrium level of output (Y). 
- Ip will decrease by 400, resulting in a new value of -200 (200-400(0.03)).
- C will decrease by 240 (0.8(300) * 0.01), resulting in a new value of 260 (500 + 0.8(Y - T) - 300(0.03)).
- We can then find the new equilibrium level of output by setting Y = C + Ip + G + NX:
Y = 260 + (-200) + 200 + 10 = 270
The change in equilibrium output is the difference between the new and original levels of output: 
270 - 305 = -35
Therefore, short-run equilibrium output would decrease by 35 units.

In a Certain Economy, the Components of Planned Spending Are