Question

**A.** **Classical/General Equilibrium
Model:** Assume that GDP (Y) is 8,500B. Consumption (C) is
given by the equation C = 210B + 0.9(Y – T). Investment (I) is
given by the equation I = 1,200B – 100B(r), where r is the real
rate of interest. Taxes (T) are 400B and government spending (G) is
500B. **Show/type your work/calculations!**

1. In this economy, compute private savings, public savings, and national savings (9 points)

Private savings =

Public savings =

National savings =

2. Find the equilibrium real interest rate, r. Prove that r satisfies the income identity Y = C + I + G. (16 points)

Answer #1

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 that the world works according to the Classical model. In a
small open economy, output is produced according to a Cobb-Douglas
production function, consumption is equal to C=40+0.6(Y-T) and the investment
function is I=280-10r. You
know that the output produced is Y=900, government spending is
G=150, taxes are
T=90 and that the world
real interest rate is 4% (r*=4).
In
all the questions below, make sure to explain your answers and show
all your work.
a.
Compute: i. Private...

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 a closed economy to which the Keynesian-cross analysis
applies. Consumption is given by the equation C = 200 + MPC(Y – T).
Planned investment (I) is 300, government spending (G) is 300 and
taxes (T) is 300. Assume MPC is equal to 2/3.
(a) If Y is 1,500, what is planned spending? What is inventory
accumulation or decumulation? Is equilibrium Y higher or lower than
1,500?
(b) What is equilibrium Y?
(1 mark)
(c) What are equilibrium consumption, private...

In a closed economy, given the following:
The consumption function C = 0.8(1 – 0.25) Y +
12
The average tax rate t = 25%
The level of private investment I = 26
The level of government spending G = 14
Where Y is the national income.
Calculate the equilibrium level of income and output in the
economy.
Calculate the expenditure multiplier and show the effect
of
an increase in government spending and
an increase in private investment.

Economists in Fundlandia, a closed economy, have collected the
following information about GDP and public savings in their
country:
Y = 1000
G = 100
T = 100
They further estimate that national savings and investment are
governed by the following expressions:
S = 150 + 50*r
I = 600 - 100*r
Where r is the country's real interest rate in % terms (thus if you
find r = 5, then r is 5%).
Problem Set #2 - Part II...

MACROECONOMICS
given:
Crowding out with algebra. Consider an economy
described by the following model.
Y = K1/3L2/3
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...

Assume that the consumption function is given by C =
200 + 0.5(Y – T) and the investment function is
I = 1,000 – 200r, where r is measured in
percent, G equals 300, and T equals 200.
A. What is the numerical formula for the IS curve?
(Hint: Substitute for C, I, and
G in the equation Y = C + I +
G and then write an equation for Y as a function
of r or r as...

Assume that the consumption function is given by C = 100 + 0.5(Y
– T) and the investment function is I = 1,000 – 100r, where r is
measured in percent, G equals 200, and T equals 100.
a. What is the numerical formula for the IS curve? (Hint:
Substitute for C, I, and G in the equation Y = C + I + G and then
write an equation for Y as a function of r or r as...

The
components of planned aggregate spending in a certain economy are
given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r
Planned Investment: I p = 400–3000r Government Revenue and
Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the
real interest rate (For example, r = 0.01 means that the real
interest rate is 1 percent). (1) Find the level of public saving.
(2) Suppose that the real interest...

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