Question 1. Given that Y=900 and desired consumption and investment are given by:
Fill in as many entries as you need to answer the questions.
Assume that this is a closed economy (NX=0).
|
R
|
C
|
I
|
G
|
S
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C+I+G
|
|
0
|
925
|
80
|
15
|
|
|
|
0.01
|
900
|
75
|
15
|
|
|
|
0.02
|
875
|
70
|
15
|
|
|
|
0.03
|
850
|
65
|
15
|
|
|
|
0.04
|
825
|
60
|
15
|
|
|
|
0.05
|
800
|
55
|
15
|
|
|
a) Find the interest rate that is consistent with equilibrium in the goods market.
b) what is national savings in equilibrium?
c) what is total desired spending in equilibrium?
d) what is desired investment in equilibrium?
Question 2: Suppose the economy-wide expected future marginal product of capital is MPK=30.1-0.01K where K is the future capital stock. The depreciation of the capital stock is 5% (0.05) per period. In parts a and b we will suppose that r=0.05 we find the equilibrium r in part d. It is unlikely to be 0.05. The price of a unit of capital is one.
The current capital stock is 1900 units of capital. The price of one unit of capital is one unit of output.
Firms do not pay any taxes.
a) what is the optimal value of capital? Supposing that the interest rate is 0.05
b) what is the optimal value of investment? Supposing that the interest rate is 0.05
c) write the optimal investment as a function of the interest rate.
d) Let the consumption function is C=4000+0.8Y-100r where C is consumption and Y is output.
Government consumption is 1005 and full employment output is 30,000.
What is the equilibrium interest rate?