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).
all the questions below, make sure to explain your answers and show
all your work.
Compute: i. Private saving, Public saving, and National saving; ii.
the amount of net capital outflows for this country; iii. the trade
balance of this country. Show your work.
Assume that the public authorities of this country decide to
decrease government spending G from $150 to $100. Assume that all
other countries around the world leave their policies
Assume again that in this country government spending G is decreased from $150 to $100.
However, assume now that most countries in the rest of the world
decide to follow the same policy and decrease government spending.
As a consequence, the world real interest rate decreases to 3%
hi. Please post parts and subparts in lot of four. Thank you!
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