2. (10) Consider an economy described as follows: Y=C+I+G Y = 14,000 G = 3,000 C...

 

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2. (10) Consider an economy described as follows: Y=C+I+G Y = 14,000 G = 3,000 C = 1,000+ 0.80 (Y-T) 1=1,900-70r (NOTE: r is the real interest rate measured as a %; e.g., 5 = 5%) *This economy is currently experiencing a budget deficit equal to 400. a. In this economy, compute public saving, private saving, and national saving. b. Find the equilibrium interest rate. c. Suppose this country's legislature passes a balanced budget amendment requiring government spending to equal net taxes. Find the new equilibrium interest rate under each of the following two options: a. Option I: Balance the budget by changing taxes b. Option II: Balance the budget by changing government spending Under which option will real interest rates be higher, and investment lower? 2. (10) Consider an economy described as follows: Y=C+I+G Y = 14,000 G = 3,000 C = 1,000+ 0.80 (Y-T) 1=1,900-70r (NOTE: r is the real interest rate measured as a %; e.g., 5 = 5%) *This economy is currently experiencing a budget deficit equal to 400. a. In this economy, compute public saving, private saving, and national saving. b. Find the equilibrium interest rate. c. Suppose this country's legislature passes a balanced budget amendment requiring government spending to equal net taxes. Find the new equilibrium interest rate under each of the following two options: a. Option I: Balance the budget by changing taxes b. Option II: Balance the budget by changing government spending Under which option will real interest rates be higher, and investment lower?

Answer rating: 100% (QA)

a To compute public saving we use the formula Public Saving T G TR where T is total taxes and TR is ... View the full answer