1. Consider an economy described by the following equations: Y=C+I+G, Y=K1/3 L2/3 K= 1000 and L=...

1. Consider an economy described by the following equations: Y=C+I+G, Y=K^1/3 L^2/3

K= 1000 and

L= 1000 and

G= 300

T= 200

C= 250 + 0.5(Y-T)-50r,

I= 300-50r.

a) With investment I on the x-axis and r on the y-axis, plot the investment function

b) Solve for private savings and national savings as a function of r. Does national savings increase as r increases? Explain.

c)Solve for consumption, private saving, investment and interest rate in the equilibrium.

d) Now suppose G increase to 350 while taxes remain unchanged. Solve for private saving,

public saving and interest rate in the equilibrium. Is there evidence of crowding out?

Explain.

e)Now suppose G= 300 and taxes, T, increase to 300. Does equilibrium interest rate and investment increase or decrease? If more investment is good for long- run growth in the economy, should taxes be increased or decreased? Explain.

Solutions

Expert Solution

1.a)

The investment function is depicted in the figure below

Rahul Sunny answered 9 months ago

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