Consider the following long-run model of an economy: On the supply side, long-run aggregate supply, Y,...

 

  

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Consider the following long-run model of an economy: On the supply side, long-run aggregate supply, Y, is produced according to the following technology: Y = A(K)¹½ (I)¹/2 where the technology parameter A= 300, capital K = 9 units and labour ī= 100 units. On the demand side: yd =C+I+G and the consumption function and the investment function are given respectively by: C = 300 +0.75(Y-T) I = 1800 - 65r Government expenditures are given by G = 1000, taxes are given by T = 300, and is the real interest rate. (Here r is measured in percent. In your calculations use the values r = 2.3, r = 3.5 etc., rather than 0.023 and 0.035) Show your work in each part of the question. If necessary, round off numbers to the third digit after the decimal point (For ex. 2.5436≈ 2.544) (10pts) (c) What is national saving in this economy? Calculate and explain briefly. (10pts) (d) What is the government budget deficit? Calculate and explain briefly. (10pts) e) Suppose now that the government decides to reduce taxes to T = 200. (i) What is the new equilibrium interest rate r*? Calculate. (ii) What is the new level of national saving? Calculate. (Assume that Ỹ is the same as what you found in part 3(a).) (iii) Draw a graph to illustrate the impact of the decrease in Ton national saving and explain briefly in words. (Your graph should be drawn with (S, I) on the horizontal axis and r on the vertical axis (see Chapter 3). You should also indicate the change in the equilibrium due to the decrease in taxes by drawing arrows to show the direction of the shift in the curves.) Consider the following long-run model of an economy: On the supply side, long-run aggregate supply, Y, is produced according to the following technology: Y = A(K)¹½ (I)¹/2 where the technology parameter A= 300, capital K = 9 units and labour ī= 100 units. On the demand side: yd =C+I+G and the consumption function and the investment function are given respectively by: C = 300 +0.75(Y-T) I = 1800 - 65r Government expenditures are given by G = 1000, taxes are given by T = 300, and is the real interest rate. (Here r is measured in percent. In your calculations use the values r = 2.3, r = 3.5 etc., rather than 0.023 and 0.035) Show your work in each part of the question. If necessary, round off numbers to the third digit after the decimal point (For ex. 2.5436≈ 2.544) (10pts) (c) What is national saving in this economy? Calculate and explain briefly. (10pts) (d) What is the government budget deficit? Calculate and explain briefly. (10pts) e) Suppose now that the government decides to reduce taxes to T = 200. (i) What is the new equilibrium interest rate r*? Calculate. (ii) What is the new level of national saving? Calculate. (Assume that Ỹ is the same as what you found in part 3(a).) (iii) Draw a graph to illustrate the impact of the decrease in Ton national saving and explain briefly in words. (Your graph should be drawn with (S, I) on the horizontal axis and r on the vertical axis (see Chapter 3). You should also indicate the change in the equilibrium due to the decrease in taxes by drawing arrows to show the direction of the shift in the curves.)

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a To find the value of Y we substitute the given values into the production function Y AK12L12 Y 300... View the full answer