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In: Economics

c. Government purchases rise to 1440. How does this increase change the equation describing desired national...

c. Government purchases rise to 1440. How does this increase change the equation describing desired national saving? Show the change graphically. What happens to the market-clearing real interest rate?

4. Suppose that the economy wide expected future marginal product of capital is MPKf = 20-0.01K, where K is the future capital stock. The depreciation rate of capital, d, is 10% per period. The current capital stock is 900 units of capital. The price of a unit of capital is 1 unit of output. Firms pay taxes equal to 50% of their output. The consumption function in the economy is C =100+0.5Y-200r, where C is consumption, Y is output, and r is the real interest rate. Government purchases equal 200, and full employment output is 1000.

a. Suppose that the real interest rate is 10% per period. What are the values of the tax-adjusted user cost of capital, the desire future capital stock, and the desired level of investment?

b. Write the tax-adjusted user cost of capital as a function of the real interest rate r. Also write the desired future capital stock and desired investment as functions of r.

c. What is the real interest rate that clears the goods market? What is the goods market-clearing values of consumption, saving, and investment? What is the tax-adjusted user cost of capitol and the desired capital stock in this equilibrium?

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Expert Solution


Rahul Sunny answered 2 years ago
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