Create a closed economy that is in a state of equilibrium at first. Assume that public saving decreases dramatically. Demonstrate how changes in interest rates (and a related variable) may bring the market into equilibrium after illustrating how changes in public savings affect the graph. What is the impact of a tiny open economy (with fixed interest rates) on the analysis?
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Answer the following question using well created graphs. Create a closed economy that is in a state of equilibrium at first. Assume that
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- Problem Set 4: Saving and Investment Economists in Fantasialand, a closed economy, have collected the following information about the economy for a particular year: Y = 9000; C = 6000; T = 1500; G = 1700. The economists also estimate that the investment function is: I = 3300 - 100r, where r is the country’s real interest rate, expressed as a percentage (i.e. r = 1 means interest rate is one percent). Calculate private saving, public saving, national saving, investment, and the equilibrium real interest rate.Suppose the following equations represents a closed economy: Y= C + I + G Y = 4000 G = 500 T = 500 C = 500 + 0.7 (Y – T) I = 1000 – 40r In this economy, compute the value of consumption (C), private saving, public saving, and national saving. Also, find the equilibrium interest rate (r). Now suppose that government spending (G) rises (expansionary fiscal policy) to 300. Compute private saving, public saving, and national saving. Also, find the new equilibrium interest rate (r). In part (b), due to expansionary fiscal policy (increase in government spending), which of the two other components of aggregate demand changes, C or I? Why? (Hint: Note the real interest rate)QUESTION 5 Neverland is a closed economy that severed all links to the outside world. Its economy can be described by the following consumption and investment curves: Ca(r) = 5000 – 1000r+0.25Y and 1d (r) = 500 – 1800r +0.2Y: Its output is y=13000 and government spending is G = 8000: What is the equilibrium interest rate (in percent)? Note: Type in your answer approximated to two decimal points, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard will automatically delete it and you should not do anything about it.
- Explain how changes in interest rates and rates of return on various investment options will affect the amount of money that businesses are willing to invest to increase output.The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario. (graph in image) Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to (a. fall, b. rise) and the level of investment spending to (a. increase, b. decrease). Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases…Consider an economy described as follows: Y = C + I + G. Y = 8,000. G = 2,500. T = 2,000. C = 1000 + 2/3(Y – T). I = 1,200 + 100r. In this economy, compute private saving, public saving, and national saving. Find the equilibrium interest rate. Now suppose that G is reduced by 500. Compute private saving, public saving, and national saving. Find the new equilibrium interest rate
- The following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 Imagine the maximum potential output or real GDP of this economy is 100. Assume that is the same as saying we reach the edge of the PPF at 100. Now assume we want to get that economy from the current level of GDP to its maximum potential of 100. We can do this in two ways - either increase government spending (G) or reduce taxes, (we will soon learn that doing this is called "using expansionary fiscal policy") but this economy does not tax its citizens so the only way to do it to increase G. How much do we increase government spending so that actual GDP reaches potential output/edge of the PPF at 100?Given a closed economy where there is no public sector. Production in the economy can be described with the following production function: Y = F (K, AL) = Kα(AL)1−α where Y is the productive capacity of the economy, K is the capital stock, L is the labor force, and A is knowledge. Think of AL as a single factor of production where knowledge and the amount of labor are multiplied together. Let's call the multiplier (ie AL) the efficiency of labor. Given that A = 1.5 and saving is a fixed rate of the production, or s = 33%. The capital stock shrinks by 3% per year, while the population grows is nobody Finally, α = 0.4. Answer the following questions based on the above criteria. (a) Show mathematically that the marginal productivity of labor and capital is positive but diminishing. Explain in words and with a picture what the term positive but diminishing marginal productivity means. (b) Show mathematically that saving and investment are equivalent in a closed economy (c) Show…Consider an economy described by the following equations: Y=C + I +G Y=7,000 G=4000 T=2,000 C=150+0.75(Y-T) I=1,000-50r In this economy, compute private saving, public saving and national saving. Calculate the equilibrium interest rate. Now suppose the G rises BY 1,000. Compute private saving, public saving, and national saving. Calculate the new equilibrium interest rate.
- We have the following data for a hypothetical closed economy: GNP = $14,000 Consumption (C) = $8,000 Government Purchases (G) = $1,200 Tax Collections (T) = $1,200 What is the value of private savings SP? $ What is the value of government savings S9? $ (Enter your answer as an integer. Include a minus sign if necessary.) (Enter your answer as an integer. Include a minus sign if necessary.) (Enter your answer as an integer. Include a minus sign if necessary.) In this closed economy, what must be the value of investment expenditure? $Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is a decrease in the tax rate on interest income, from 20% to 15%. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment spending toA closed economy was observed in two different years to be operating with levels of output at: (a) aggregate supply was equal aggregate demand for goods and services but planned domestic investment was greater than planned domestic saving ( b) aggregate supply was equal aggregate demand for goods and service but planned domestic investment was less than planned domestic saving. Use a diagram to explain the forces that would move the economy towards a stable equilibrium in each case.