Consider an economy in which the consumption, investment and production functions are as follows C =...

Consider an economy in which the consumption, investment and production functions are as follows

C = 10 + 0.8(Y - T)

I = 40 - 2.5r

F(K,L) = K^1/3 L^2/3

Suppose government spending is 20, taxes equal 25 and the supply of factors is K^S = L^S = 125. Answer the following questions.

What is the equilibrium level of real GDP.?
What is the equilibrium real interest rate?
Find the level of national savings. How much of that savings is from the private agents?
Find the level of investment in equilibrium.
Suppose taxes increase to 35. What is its effect on private savings? (Give numerical answer)

Expert Solution

Rahul Sunny answered 2 years ago

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