equilibrium GDP

Suppose that the federal reserve wishes to keep nominal interest rate at a target level of 5%. Draw a money supply and demand diagram in which the current equilibrium interest rate is 5%. Explain how the federal reserve, using Open Market Operations monetary policy, could keep the interest rate at its target level if the demand for money suddenly declines. How does this affect equilibrium GDP?

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Equilibrium GDP

Consider an economy in which investment (I) equals 400, government purchases (G) equals 800, taxes (T) equal 600, exports (X) equals 200, and imports (M) equal 250. The consumption function is:

C = 100 + 0.8(Y-T)

What is equilibrium GDP? What will equilibrium GDP equal if government expenditures increase 200? What will equilibrium GDP equal if taxes decrease 200? Why are the results different?

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