1. Let the following equations characterize the economy (note the addition of a tax rate on output):

Y= 500

C = 60 + 0.8(Y-T)

I = 30 - r

G = 100

T = 0.4Y

a) Calculate national saving, private saving, and public saving.

b) Obtain the mathematical expression for the AD in this particular economy. Draw the graph.

c) Determine the equilibrium interest rate (you can use the loanable funds market). Draw the graph for the lonable funds market.

d) If Government spending increases to 120, what is the effect on income? Draw the new equilibrium in a graph (old and new in same graph).

2. Use the loanable funds market to illustrate the effect of the following events on the equilibrium. Illustrate the effects on the interest rate and quantity of investment-savings (explain thoroughly):

a) The proportion of retired people in the population goes up. Think that usually retired people generally save less than working people at any interest rate.

b) At any given interest rate, consumers decide to save more (assume the budget balance is zero).

c) At any given interest rate, businesses become very optimistic about the future profitability of investment spending (assume the budget balance is zero).

3. Assume that the government is running a balanced budget (revenues equal spending). Then, government decides to increase education spending by $200 billion and finance the spending by selling bonds. Therefore, spending increases and it is funded by borrowing. Use the loanable funds market to explain how the equilibrim is going to be affected (effects on interest rate, investment and savings). Use the math and the graphs. Is there any crowding out in the market?

4. Consider the following version of the Keynesian cross:

Assume that taxes (T) are not fixed but depend on income in the following way: T= T+tY where T >0 and 00, and b >0.

(a) How does this tax system change the lway consumption responds tochanges in GDP?

(b) In the Keynesian cross, how does this tax system alter the government-purchases?

(c) Find the IS equation from this Kenesian cross mode. How does this tax system alter the slope of the IS curve?

Transcribed Image Text:

(1) Y=C+I+G (2) C=C+c(Y-T) (3) I=ī-br (1) Y=C+I+G (2) C=C+c(Y-T) (3) I=ī-br

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1 Let the following equations characterize the economy note the addition of a tax rate on output Y 500 C 60 08YT I 30 r G 100 T 04Y a Calculate national saving private saving and public saving Public ... View the full answer