Assume that an economy is described by: IS Curve: LM Curve: Y = 3,600 + 3G - 2T 150r Investment function: 2M Y = + 100r P I = 1,000 - 50r Consumption function: C = 200+ (Y-T) 2 3 Long-run equilibrium output for this economy is 4,000 and the price level is 1. (a) Assume that the government spending is fixed at 1,200. The government wants to achieve a level of investment equal to 900 and achieve Y = 4,000. What level of r is needed for I = 900? What levels of T and M must be set to achieve the two goals? What will be the levels of private saving, public saving, and national saving? (b) Now assume that the government wants to cut taxes to 1,000. With G set at 1,200, what will the interest rate be at Y = 4,000? What must be the value of M? What will I be? What will be the levels of private, public, and national saving? Explain.

Assume that an economy is described by: IS Curve: LM Curve: Y = 3,600 + 3G - 2T 150r Investment function: 2M Y = + 100r P I = 1,000 - 50r Consumption function: C = 200+ (Y-T) 2 3 Long-run equilibrium output for this economy is 4,000 and the price level is 1. (a) Assume that the government spending is fixed at 1,200. The government wants to achieve a level of investment equal to 900 and achieve Y = 4,000. What level of r is needed for I = 900? What levels of T and M must be set to achieve the two goals? What will be the levels of private saving, public saving, and national saving? (b) Now assume that the government wants to cut taxes to 1,000. With G set at 1,200, what will the interest rate be at Y = 4,000? What must be the value of M? What will I be? What will be the levels of private, public, and national saving? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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