Suppose that real output is fixed at Y = Y¯ = 300, consumption is fixed at C = C¯=200, government spending is fixed at G = G¯=30.
Suppose that the Investment function takes the following form I (r) = 75-r
Suppose that the quantity equation of money holds M x V = P x Y and the velocity of money is constant, V. (a) If the money supply increases by 3 percent, by what percentage rate do prices change? That is, what is the inflation rate? (b) What is the real rate of interest r in this economy? What is the investment level I? (c) What is the nominal interest rate? (d) If government spending G increases to 35, what happens to the real rate of interest r, investment I , and the nominal interest rate i?