Problem 4. In a closed economy, consumption is C = 100++0.8Yp– 50r, taxes T = 200 and transfers are530 – 10,000r. Output is Y = 1000. Public debt is zero.TR= 100. The investment function is I =(A) Find government spending G if the government budget is balanced.(B) Derive the total savings function S(r). Do savings depend on the interest rate? If yes, positively ornegatively? Why? Give economic reasoning.(C) Find the equilibrium on the loanable funds market: find, at equilibrium, r, S and I.(D) The government raises its spending by 150 and finances this by borrowing. Find the new equilibrium.Does the crowding out effect takes place? If yes, describe it in detail: what crowds out what. If not,explain why.(E) Instead, the government raises its spending by the same 150 and finances this by raising taxes byan equal amount (to keep the budget balanced). Find the new equilibrium. Does the crowding outeffect takes place? If yes, describe it in detail: what crowds out what. If not, explain why.(F) Draw the loanable funds market diagram. Show the initial equilibrium and the two equilibria underthe two fiscal policies.

C=100+0.8YD-50r T=200 TR=100 I=530-10,000r Y=0 Public Debt=0

Answered: Problem 4. In a closed economy,…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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