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)
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