Question

MACROECONOMICS

given:

**Crowding out with algebra.** Consider an economy
described by the following model.

Y = K^{1/3}L^{2/3}

K = 1000; L = 1000

G = 100

T = 100

C = 250 + 0.5(Y-T)

I = 600 – 100r

i. Calculate the equilibrium real interest rate, national saving, public saving, private saving, consumption, output, and investment. List your numbers out like this:

Y = 1000

r = 4

S = 200

Spub = 0

Spriv = 200

C = 700

I = 200

ii. Suppose the government increases G to 250. Repeat your calculations to find the new real interest rate, national saving, and investment. You only need to report the numbers since your method should be the same as in part (i).

Y = 1000

r = 5.5

S = 50

Spub = -150

Spriv = 200

C = 700

I = 50

**Question:**

If modify the consumption function to it depends on r, as discussed briefly in the textbook, we can make S depend on r which is more realistic.

i. Which consumption function would make S(r) increase with the
real interest rate? Briefly explain your choice.

C = 450 + 0.5(Y-T) – 50r
OR C = 50 +
0.5(Y-T) + 50r

ii. Is there more, less, or the same amount of crowding out when G increases in this modified version? (In other words, repeat question 9 but with the new S(r) function.) Explain!

Answer #1

Consider an economy with the given equations.
Y = C + I + G + NX
Y=$5500
G=$1100
T=$1200
C=$200+0.60(Y−T)
I=1100−50r
NX=1270−1270?
r=r*=5
b. Suppose now that G rises to $1400. Solve for private saving,
public saving, national saving, investment, the trade balance, and
the equilibrium exchange rate.
Public savings = $_____
National savings = $____
Investment = $_____
Net exports (trade balance) = $____
Exchange rate _____
c. Suppose that the world interest rate rises
from 5 to 12...

Consider the following economy
Y = C + I + G
Y = 5,000
G = 1000
T = 1000
C= 250 + 0.75(Y-T)
I = 1000 – 50r
Compute private savings, public savings and national
savings.
Find the equilibrium interest rate.
Suppose G rises to 1,250. Compute private savings, public
savings, national savings and the interest rate. Explain
intuitively why these variables have changed

Equilibrium Values and Saving
Assume that GDP (Y) is 5,000. Consumption (C) is given by the
equation C = 1,000 + 0.3(Y – T). Investment (I) is given by the
equation I = 1,500 – 50r, where r is the real interest rate in
percent. Taxes (T) are 1,000. Government spending (G) is 1,500.
What are the equilibrium values of C, I, and r?
What are the values of private saving, public saving, and
national saving?
Now assume there is...

Assume the following model of the economy, with the price level
fixed at 1.0:
C = 0.6(Y – T)
T = 40
I = 120 – 30r
G = 40
Y = C + I + G
Ms/P = Md/P = 2Y – 50r
Ms = 280
Write a numerical formula for the IS curve, showing Y as a
function of r alone. (Hint: Substitute out C, I, G, and T.)
Write a numerical formula for the LM curve, showing...

Y = C + I + G + NX
Y = 18,500; G = 4,000; T = 2,000
C = 750 + 3/4 (Y - T)
I = 1,000 - 50r
CF = 750 - 25r
NX = 1,825 - 150ϵϵ
The world interest rate increases to r* = 10. Solve for
consumption, private and public saving, national saving,
investment, the trade balance, the net capital outflow (net foreign
investment), the domestic real interest rate, and the real exchange
rate....

Consider an economy described by the following
equations:
Y=C+I+G+NX,
Y=8,000
G=2,500
T=2,000
C=500 +
0.75(Y−T)
I=900−50r
NX=1,500−250ϵ
r=r∗=8.
a.
In this economy, solve for private saving, public saving, national
saving, investment, the trade balance, and the equilibrium exchange
rate.
b.
Suppose now that G is cut to 2,000. Solve for private saving,
public saving, national saving, investment, the trade balance, and
the equilibrium exchange rate. Explain what you find.
c.
Now suppose that the world interest rate falls from 8...

1. Consider an economy that produces and consumes bread and
automobiles. In the table below are data for two different
years:
Year 2010
Year 2025
Price of an automobile
$50,000
$60,000
Price of a loaf of bread
$10
$20
Number of automobiles produced
100
120
Number of loaves of bread produced
500,000
400,000
Using the year 2010 as the base year, compute the following:
nominal GDP, implicit price deflator and the CPI.
2.
Assume that GDP (Y) is 5,000. Consumption...

a. Consider the following long-run model:
Real GDP (Y) = 2,000; Consumption (C) = 300 + 0.6 (Y-T);
Investment (I) = 500 -30r where r is the real interest rate; Taxes
(T) = 450;
Government spending (G) = 400.
i. Compute consumption, private savings, public savings, national
savings, investment
and the real interest rate.
ii. Using the same model, except now C= 200 + 0.6(Y-T). Compute
consumption,
private savings, public savings, national savings, investment and
the real interest
rate.
iii....

Assume the following model of the economy, with the price level
fixed at 1.0:
C = 0.8(Y – T)
T = 1,000
I = 800 – 20r
G = 1,000
Y = C + I + G
Ms/P =
Md/P = 0.4Y –
40r
Ms = 1,200
A. Write a numerical formula for the IS curve, showing
Y as a function of r alone. (Hint:
Substitute out C, I, G, and
T.)
B. Write a numerical formula for the LM...

An economy is described by the following equation:
C = 1600 + 0.6 (Y - T) - 2000 r
IP = 2500 - 1000 r
G = 2000
T = 1500
C is the consumption, IP is the planned investment, G
is the government spending, T is the net taxes, r is the real
interest rate.
This economy is a closed economy meaning that the Net Exports
are always 0, i.e. NX = 0.
a. Find an equation relating the...

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