Siberia can be considered as a closed economy. Recentdata about its population movements indicate that the region suffered from asevere loss in its working age population from 1995 to 2005. As aconsequence full employment output declinedfrom Y 1995 = 100to Y 2005 = 90.
This question asks you to analyze the long-run implications of different fiscal policies available to Siberian offcials. Theeconomy can be described as follows:
C(r) = 10 + 0.6Y -1000r
I(r) =50-1000r G=20
(a) What were the equilibrium levels of the real interestrate, consumption and investment in 1995?
(b) In 2005 government offcials consider changinggovernment expenditures in order to keep investment at the same level as it was in 1995. What must the valueof G be to implement this policy?
(c) The second policy under consideration is to altergovernment expenditures in order to maintain private consumption atits 1995 level. What must the value of Gbe in this case?