Assume that the economy uses Cobb Douglas Production Function of the form: , and A=4, L=10000, K=100. Consumption (C) is given by the equation C = 700 + 0.8(Y – T). Investment (I) is given by the equation I = 1,000 – 100r, where r is the real rate of interest in percent. Taxes (T) are 500 and government spending (G) is also 500.
a. What are the equilibrium values of Y, real wages, real rental rate of capital, C, I, and r? What is the income share paid to labor?
b. What are the values of private saving, public saving, and national saving?
c. If government decides to increase taxes to 1,000, what are the new equilibrium values of Y, C, I, and r?
d. What are the new equilibrium values of private saving, public saving, and national saving?