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

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...

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...

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

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...

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...

Given an economy described by the following set of
equations.
Y = C(Y - T) + I(r) + G
C = 200 + 0.80(Y - T)
I = 300 - 2r
G = 400
T = 200
(M/P)d = 0.80Y - 8r
Ms = 5,600
Price-level = P = 2
What is the equilibrium level of consumption?

Given an economy described by the following set of
equations.
Y = C(Y - T) + I(r) + G
C = 200 + 0.80(Y - T)
I = 300 - 2r
G = 400
T = 200
(M/P)d = 0.80Y - 8r
Ms = 5,600
Price-level = P = 2
What is the equilibrium level of consumption?

Consider an economy in the short-run described by the following
equations:
Z = C + I + G
G = 500
T = 500
C = 250 + 0.75(Y – T)
I = 625
a. What is the equilibrium condition that allows us to solve for
Y. Find Y. Compute private saving, public saving and total/national
saving at this level of Y.
b. What is the value of the marginal propensity to consume? What
is the value of the expenditure...

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...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 4 minutes ago

asked 4 minutes ago

asked 4 minutes ago

asked 4 minutes ago

asked 6 minutes ago

asked 6 minutes ago

asked 7 minutes ago

asked 11 minutes ago

asked 13 minutes ago

asked 14 minutes ago

asked 14 minutes ago