A Keynesian economy is described by the following equations.
Cd = 250 + 0.5(Y – T) – 250r
Id = 250 – 250r
G = 300
T = 300
L = 0.5Y – 500r + πe
M = 3000
Y = 1250
πe = 0
(a) Calculate the values of the real interest rate, the price level, consumption, and investment for the economy in general equilibrium.
(b) Now suppose government purchases increase to 350 with no change in taxes. What will be the real interest rate, the price level, output, consumption, and investment in the short run?
(c) What will be the real interest rate, the price level, output, consumption, and investment in the long run?
