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Consider an economy in which the consumption, investment and production functions are as follows. C = 90 +0.7(Y-T) I= 250-20r

Consider an economy in which the consumption, investment and production functions are as follows. C = 90 +0.7(Y-T) I= 250-20r

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider an economy in which the consumption, investment and production functions are as follows. C = 90 +0.7(Y-T) I= 250 207 F(K, L) = AK¹/2¹/2 The capital and labor supply are equal to 100 each, A-10, G = 200 and T = 200. Compute the equilibrium values of output, overall labor income, consumption, public savings, national savings, investment, and the interest rate. Suppose now government spending increases to G=300 (everything else stays the same). What happens to output, consumption, savings, investment and the interest rate? Compute the new values for these variables.
Transcribed Image Text:Consider an economy in which the consumption, investment and production functions are as follows. C = 90 +0.7(Y-T) I= 250 207 F(K, L) = AK¹/2¹/2 The capital and labor supply are equal to 100 each, A-10, G = 200 and T = 200. Compute the equilibrium values of output, overall labor income, consumption, public savings, national savings, investment, and the interest rate. Suppose now government spending increases to G=300 (everything else stays the same). What happens to output, consumption, savings, investment and the interest rate? Compute the new values for these variables.
Expert Solution
Step 1

Equilibrium in economy is achieved at the point where , aggregate demand equals aggregate output/supply .

Aggregate Demand = C + I + G 

Aggregate Output = F(K,L)

 

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