Question

In: Economics

A closed economy can be described by the long-run classical model: Y = 2KαL1–α C =...

A closed economy can be described by the long-run classical model:

Y = 2KαL1–α

C = 18500 + 0.75(Y – T) – 800r

I(r) = 11000 – 1200r

Note: r represents the real interest rate and is measured in percentage points (for example, if we find r = 10, then r is interpreted as being equal to 10%). Keep your answer to 4 decimal places if needed.

Assume that there are two factors of production, capital (K) and labour (L), and that they are both fully employed. For this economy the supply of capital and labour are 27000 and 64000 respectively; and one-third of output goes to capital owner. Initially, the government collects 6% of the economy’s (long-run) output as (income) taxes, and the size of the budget deficit is 540.

  1. Compute the long-run equilibrium levels of consumption, investment and private savings. Also, find the long-run equilibrium real wage for labour.  
  2. Suppose the newly elected government wants to set the equilibrium level of national savings to 9104 via a change in (income) taxes. Find the level of taxes that will achieve the goal. What happens to the level of private savings (i.e., does it change? By how much).  

Now, return to the initial long-run equilibrium as shown in part (a). Suppose there is a downward adjustment in the stock market. As a result, autonomous consumption falls by 10%.

  1. Why does autonomous consumption fall when there is a downward adjustment in the stock market? Explain in words
  2. Find the new long-run equilibrium levels of consumption and private savings.  
  3. Use the diagram for the loanable funds market to show your findings in parts (a) and (d). Be sure to clearly identify the equilibrium to each part of the question in your diagrams. No written explanation is needed.  

Solutions

Expert Solution

Rahul Sunny answered 1 year ago
Next > < Previous

Related Solutions

A closed economy can be described by the long-run classical model: Y = 5K 1/4L 3/4...
A closed economy can be described by the long-run classical model: Y = 5K 1/4L 3/4 C = 23500 + 0.6(Y – T) – 1200r I = 15000 – 800r MPK = 1.25K – 3/4L 3/4 MPL = 3.75K 1/4L –1/4 In this economy, there are two productive factors, K and L and both factor inputs are fully employed. The stock of capital and the supply of labour are equal to 50625 and 10000 respectively. Initially, the level of government...
Equilibrium in the Classical model: Consider an economy described by the following equations: Y = C...
Equilibrium in the Classical model: Consider an economy described by the following equations: Y = C + I + G Y = 12,000 G = 2,000 T = 2,000 C = 500 + 0.75*(Y – T) I = 2,400 – 80*r a) In this economy, compute private saving, public saving, and national saving. b) Find the equilibrium real interest rate r. c) Now suppose that G rises to 1,200. Compute private saving, public saving, and national saving in this case....
Consider a classical model of large-open economy described by the following equations: Y = C +...
Consider a classical model of large-open economy described by the following equations: Y = C + I + G + NX Y = 8,000 G = 2,500 T = 2,000 C = 500 + 2/3 (Y − T) I = 1,000 − 50r CF = 500 − 50r NX = 1,000 − 250ε where Y is output, C is consumption, I is investment, G is government purchases, NX is net exports, T is taxes, r is the real interest rate,...
Tenement Yaard is a small open economy described by the following long-run classical equations where Y...
Tenement Yaard is a small open economy described by the following long-run classical equations where Y is the economy's real GDP, T-taxes, G- government spending, NX - net exports, I- investment C- consumption, r- domestic interest rates, r*- world interest rates: Y= C + I + G + NX Y = 6000 G = 1000 T = 1000 C = 300 + 0.8 (Y-T) I = 2000 - 50r NX = 500 - 400e r = r* = 4 a....
Tenement Yaard is a small open economy described by the following long-run classical equations where Y...
Tenement Yaard is a small open economy described by the following long-run classical equations where Y is the economy's real GDP, T-taxes, G- government spending, NX - net exports, I- investment C- consumption, r- domestic interest rates, r*- world interest rates: Y= C + I + G + NX Y = 5000 G = 1200 T = 1050 C = 200 + 0.75 (Y-T) I = 1500 - 60r NX = 450 - 200e r = r* = 3 a....
4- Classical Model: The Long Run 1.1 Open Economy Solve for the following Y, W P...
4- Classical Model: The Long Run 1.1 Open Economy Solve for the following Y, W P , L, C, I, Nx, r, i, Md ,   when 4- the real rate of interest increases answer key 1. Y , ¯ ¯ (W/P), L¯ 2. r ?? C, I ? 3. r ?? CF ?? e ? 4. r ?? i ?? Md ?? P ? 5. e, P ?? E ?? Nx ? Explain in as much detail as possible. Nx...
Consider a classical economy described by the following equations Y = C + I + G...
Consider a classical economy described by the following equations Y = C + I + G Y = 6000 G = 1200 T = 0 C = 3600 – 2000 r + 0.1 Y I = 1200 – 4000 r a. Develop an equation relating national savings to r and y. (Hint solve for private savings and then public savings) b. Find the real rates interest that clears the good market. c. Suppose government produces rises to 1440. How does...
Use the classical model for determining the long-run outcome of the economy to answer the following...
Use the classical model for determining the long-run outcome of the economy to answer the following question. Suppose a government in debt crisis (such as Greece) moves to reduce its budget deficit by reducing the annual funding for tertiary education and healthcare drastically. (b) State and explain in words what happens to the real interest rate, national saving, investment, consumption, and output. (c) Discuss the likely impact of such policy on the inequality of income between the educated and uneducated...
Consider the long-run model of a closed economy with a marginal propensity to consume of 0.8....
Consider the long-run model of a closed economy with a marginal propensity to consume of 0.8. Suppose the government cuts taxes by $100 billion while holding government purchases constant. What happens to the following variables? Explain and calculate the amount of change for each variable. a. Public saving (Sg): b. Private saving (Sp): c. National Saving (S): d. Investment (I)
Consider a closed economy income-expenditure model of the economy where the country begins in a long-run...
Consider a closed economy income-expenditure model of the economy where the country begins in a long-run equilibrium. • Investment (I) and government spending (G) are fixed: I = 41.5, G = 26. • The income tax rate is t = 6.25%, so tax revenue equals T = tY . • The consumption function is C = 12 + 0.8Yd, where Yd = (1 − t)Y . For the calculations below, write your answers as either a fraction or to two...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT