Question

 

Solve the following problems, showing all of your calculations .

Assume the following:

GDP (Y) = 5,000

• C (consumption)= 750 + 0.5(Y-T).
• I (investment)= 1500 – 50r, where r is the real rate of interest in percent.
• T (taxes)= 1,250
• G(government spending) = 1,125

1.    What are the equilibrium values of C, I and r?
2. A technical innovation increases investment to the function I = 2,000 - 50r. What are the new equilibrium values of C, I, and r?

Answer 1

$Y=C+I+G$

$C=750+0.5×(Y-T)$

$=750+0.5×(5000-1250)=2625$

$Y=2625+(1500-50r)+1125$

$=2625+(1500-50r)+1125$

$5000=5250-50r$

$50r=250$

$r=5$

$I=1500-50×50=1250$

B)

$C=Y-I-G$

$C=5000-(2000-5r)-1125$

$C=1875+50r$

$C=1875+50×50=2125$

$I=2000-50×50=1750$