1. Use the four quadrant diagram of the Classical model with the production function to determine:
(a) the effect of a decrease in government taxes on Y, W/P , R/P, S ,r.
(b) the effect of decrease in capital (K decrease ) on Y; W/P , R/P, S ,r
2. Consider a country where the velocity of money is constant. Real GDP grows by 3% per year, the money stock grows by 4% per year, and the nominal interest rate is 3%.
Using the approximate Fisher Equation what is the real interest rate in the economy specifiied above?