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HW 3.013 - Assume that output equals full-employment...

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ECON 304, SECTION 013 INTERMEDIATE MACROECONOMIC POLICY HOMEWORK 3 (CHAPTER 4) PROBLEMS DUE: FRIDAY, SEPTEMBER 25, 2009 1. (a) What are the two components of the user cost of capital? (b) What is the desired capital stock? (c) How does the desired capital stock depend on the expected future marginal product of capital, the user cost of capital, and the effective tax rate? 2. An economy has full-employment output ( 29 Y equal to 6000. Government purchases ( G ) are 1200. Desired consumption and desired investment are Y r C d 10 . 2000 3600 + - = r I d 4000 1200 - = , where Y is output and r is the real interest rate. (a) Find an equation relating desired national saving ( 29 d S to r and Y . (b) Use both versions of the Goods Market equilibrium condition—equations (4.7) and (4.8) in the text—to find the real interest rate that clears the goods market.
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Unformatted text preview: Assume that output equals full-employment output. (c) Government purchases rise to 1440 (this is an G ↑ ). Show me what happens in the goods market using the Investment/Saving graph. What happens to the market-clearing real interest rate? 3. Suppose that the economy is characterized by the following behavioral equations: 100 150 150 6 . 160 = = = + = T G I Y C d D (a) Solve for equilibrium GDP ( Y ), solve for disposable income ( Y D ), and solve for consumption spending ( C ). (b) Assume that output is equal to 900. Compute total demand. Is it equal to production? Explain. (c) Assume output is equal to 1000. Compute total demand. Is it equal to production? Explain. (d) Assume output is equal to 1000. Compute private saving. Is it equal to investment? Explain. 1...
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