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Suppose that the investment curve is / = 100 – 5r, and the marginal propensity to consume is 0.75. If the interest rate falls

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Answer #1

Let the goods market equation be

Y = C+I

= 0.75Y + 100-5r

Initially r was 4.

Y = 0.75Y +100 - 5*4

0.25Y = 80

Y=320..

When r fell to 3,

Y= 0.75Y + 100 -5*3

0.25Y=85

Y=340.

Hence Y has to increase by 20.

The correct option is 20.

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