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Question 1: General Equilibrium in closed and open economies [50 marks] Consider the following closed Keynesian...

Question 1: General Equilibrium in closed and open economies [50 marks]

Consider the following closed Keynesian economy

Desired consumption, Cd = 1000 + 0.6(Y-T) - 300r;

Desired investment, Id = 600 - 300r;

Money deman d, L = 0.6Y - 300r;

Output, Ȳ = 4000;

Expected inflation, πe = 0;

Calculate the investment and consumption.

c. Find the new long-run equilibrium by taking M = 6000 and the price level as flexible (repeat part a). The following are the steps to help you find it:

(i) Find an equation describing the IS curve in the following format: r = f(Y)

(ii) Find an equation describing the LM curve in the following format: r = g(Y, P )

(iii) What is the value of output at the FE line?

(iv) Given that value, use the IS curve to find the real interest rate. Calculate the investment and consumption.

(v) Given the values of output and real interest rate, find the price level.

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