Consider a hypothetical econom
Consider a hypothetical economy where: • C(Yd) = 105 + 0.8 × (Y− T) • I(r) = 74 − 1 × r • G = 65 • T = 50 1. Using the informationabove, write out the planned Aggregate Expenditure equation. 2.Write down an expression for the Investment-Savings (IS) Curve. 3.Assume that inflation is zero, so that i = r. This economy’scentral bank follows a given Monetary Policy Rule: r = i = 0.003 ×Y + 0.001 × P where P is the price level. Given this and theexpression for the IS Curve, write down an expression for theAggregate Demand Curve. 4. Suppose that the price level (P) is1000. What is the equilibrium value of aggregate income, Y ? 5.What are the equilibrium values of the interest rate, r, andinvestment, I? 6. Suppose that the price level (P) falls to 500.What is the equilibrium value of aggregate income, Y ? 7. What arethe new equilibrium values of the interest rate, r, and investment,I? 8. Discuss why the change in the price level has the identifiedimpacts on Y , r and I
ONLY ANWSER QUESTION 8
Answer:
Price level is the average ofcurrent price in the economy including goods and services alltogether. In other words price level is the price of goods,services in an economy.
Change in Price level and Y: Whenthe price level changes (increases or decreases) the output levelalso changes(increases or decreases). When the price levelincreases the people demand less due to higher price, so theproduction in the economy decreases Y. When price level decreasesthe people in the economy demand more goods and services whichleads to higher production leasds to increase in Y.
Change in Price level and r(interestrate): As discussed earlier decrease in price level increases Y. Toproduce Y producer borrowed from the market for which they have topaid certain interest rate. For this average interest rate in theeconomy decreases. Like this when price level increases theincrease in interest rate.
Change in Price level andI(Investment): As discussed, decrease in price level decreases ininterest rate. Decreases in interest rate increase investmentdemand. If there is an increase in price level the interest rateincreases which leads to decrease in investment demand.
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