In the classic model given the following:

Production function: Y=3 K^.5 L^.5

Labor (L) is 400 units

Capital (K) is 100 units

Taxes (T) are 200

Government Spending (G) is 100

Marginal Propensity to Consume is .6

Investment is determined by the following function: I(r) = 1000- 100r where r is real interest rate.

1. a) If Government spending increases to 150, Investment and Savings and the interest rate will change. By how much? b) Output, Taxes and Consumption will not change. Briefly explain why not.

2) If Taxes increase (assuming Government spending is back to 100), will the following increase, decrease or stay the same? Y, C, Private S, Public S, National S, I and r.

Answer rating: 100% (QA)

1 a If Government spending increases to 150 Investment will decrease by 50 as the increase in govern... View the full answer