econ 2000 assignment 1

# econ 2000 assignment 1 - York University Fall 2015...

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York University Fall 2015 Professor Irene Henriques Section B Dianne Lam (Student #) Jessica Tang (213832902) ECON 2000 B & A: Applied Macroeconomics Assignment #1 1. Assume that there are two factors of production, K and L and that they are both fully employed at K = ´ K and L = ´ L . Assume the economy is described by the following set of equations. Y = ´ Y = F ( ´ L, ´ K ) = 1200 Y = C + I + G C = 125 + 0.8(Y-T) I = I(r) = 200 – 20r G = ´ G = 150 T = ´ T = 100 a) Calculate consumption, the interest rate, national savings, and investment. Consumption: C = 125 – 0.8(Y-T) C = 125 + 0.8(1200-100) C = \$1005 Investment: Y = C + I + G 1200 = 1005 + I + 150 I = 45 Interest rate: I = 200 – 20r 20r = 200 – 45 r = 7.75% Saving : S = Y – C – G S = 1200 – 1005 – 150 S = 45 b) Suppose the government raises taxes from 100 to 150. Calculate consumption, the interest rate, national savings and investment. Consumption: C = 125 – 0.8(Y-T) C = 125 + 0.8(1200-150) Page 1

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C = 965 Investment: Y = C + I + G 1200 = 965 + I + 150 I = 85 Interest rate: I = 200 – 20r 20r = 200 – 85 r = 5.75% Saving : S = Y – C – G S = 1200 –965– 150 S = 85 c) Draw a graph of savings, investment and interest rate showing the results of (a) and (b).
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