The decisions made by different agents in an economy is described by the following equations:
Consumption function: C = 40 + 0.8 (Yd); Yd = disposable income
Tax function: T = 20
Investment function: I = 55 – 2r
Government spending function: G = 20
Exports: X = 10
Imports: M = 10
a. Find the equation for goods market equilibrium for the economy described above.
b. Given that the real interest rate in the economy is 4%, calculate
i. Consumption
ii. Investment
c. What would happen to the goods market equilibrium in the economy change, if the marginal propensity to consume decreases to 0.7 and the interest sensitivity of investment increases to 3?