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In: Economics

Assume that GDP is Y = 150. Consumption is C = 50 + .8(Y-T), Investment is...

  1. Assume that GDP is Y = 150. Consumption is C = 50 + .8(Y-T), Investment is I = 100 – 500r, where r is the real interest rate. Taxes are T = 50 and government expenditures are G =20.
    1. Calculate the equilibrium values of C, I, and r.
    2. Calculate the equilibrium values of private saving, government saving, and total saving.
    3. Now suppose due to a war there is an increase in Government expenditures to G=70 without a corresponding increase in taxes (aka it is funded by deficit spending). Calculate C, I, and r.
    4. Calculate the new equilibrium values of private saving, government saving, and total saving.
    5. What happened as a result of the deficit funded ↑ in G? Think of which values have actually changed, was this discussed in class previously?

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Expert Solution

Rahul Sunny answered 2 hours ago
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