Homework 2 - Economics 309 Problem Set 2 Spring 2006 1....

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Economics 309 Spring 2006 Problem Set 2 1. Suppose the supply side of the California macroeconomy is characterized as follows: Y = 4 K 1/3 L 2/3 K = 125 L = 125 Suppose the demand side of the economy is characterized by the following: G = 100 T = 100 C = 60 + 0.6(Y-T) I = 200 - 1000r a) Compute the equilibrium levels of the following four variables: investment, consumption, private saving, and the real interest rate . Show your work. b) Governor Schwarzenegger has promised to cut taxes. What effect will this have on the California economy – in particular state for each of the variables you found in part (a) above whether its equilibrium value will rise relative to the answer in part (a), fall, not change, or is ambiguous. No computations necessary. Explain briefly the economic intuition. c) Return again to the consumption function given above. Governor Schwarzenegger has promised also to cut government spending. Assume that taxes and government spending both are cut an equal amount, so that there is no government budget deficit. How will this
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This note was uploaded on 04/14/2010 for the course ECON 3353 taught by Professor Prodan during the Spring '05 term at University of Alabama - Huntsville.

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Homework 2 - Economics 309 Problem Set 2 Spring 2006 1....

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