2. Suppose a closed economy in the long run is characterized by the following equations:Y =C+I+GY = Y = 5,000C= 250+0.75 x (Y -T+Tr)I 1,000-50r%3DG=1,000T =1,300Tr 300Y is total output, Y is potential GDP (full employment output), C is consumption, / isinvestment, r is the real interest rate (as a whole number, so r 5 is a 5% real interestrate), G is government spending, Tis taxes, and Tr is transfer payments.a. Look at the consumption function (the third equation). What is the marginal propensityto consume? What does it mean? What is autonomous consumption? What does it mean?b. Compute the level of consumption spending, private saving, public saving, andnational saving.c. Find the equilibrium interest rate r and the associated level of investment spending.Note that the equilibrium interest rate you find will already be given in percentage terms.For example, if you find that r 8, this mean that the interest rate is 8%.d. Suppose that government spending increases to 1,250 (so that AG=250). Assume taxesand transfer payments are unchanged. Compute the new level of private saving, publicsaving, and national saving.e. Find the new equilibrium interest rate and the new level of investment spending. Hint:Y is still 5000, since GDP is fixed at potential GDP in the long-run.

The equilibrium interest rate is the rate at which the quantity of money demanded is equal to the…

c. Find the equilibrium interest rate r and the associated level of investment spending. Note that the equilibrium interest rate you find will already be given in percentage terms. For example, if you find thatr 8, this mean that the interest rate is 8%. %3! d. Suppose that government spending increases to 1,250 (so that AG-250). Assume taxes and transfer payments are unchanged. Compute the new level of privaté saving, public saving, and national saving. c. Find the new equilibrium interest rate and the new level of investment spending. Hint: Y is still 5000, since GDP is fixed at potential GDP in the long-run.

c. Find the equilibrium interest rate r and the associated level of investment spending. Note that the equilibrium interest rate you find will already be given in percentage terms. For example, if you find thatr 8, this mean that the interest rate is 8%. %3! d. Suppose that government spending increases to 1,250 (so that AG-250). Assume taxes and transfer payments are unchanged. Compute the new level of privaté saving, public saving, and national saving. c. Find the new equilibrium interest rate and the new level of investment spending. Hint: Y is still 5000, since GDP is fixed at potential GDP in the long-run.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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