problem 8 - ECON 162B-A0, A1 Fall 2010 PROBLEM SET NUMBER...

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ECON 162B-A0, A1 Kenny Christianson Fall 2010 due: November 24 PROBLEM SET NUMBER EIGHT 1. In the classical model, what is the effect of an increase in government spending that is not financed by an increase in taxes (an increase in the deficit)? How do prices, real GDP, consumption, saving, investment spending, and real interest rates change as a result of the increase in government spending? Explain and show graphically. 2. Assume that the level of autonomous consumption in Mudville is $800. If the marginal propensity to consume is 0.75, what is the consumption function? Saving function? Give an equation for each and show each graphically. At what level of income is saving = 0? Show on your graphs. 3. Assume a closed economy (no exports or imports) and that taxes = 0. The consumption function is given by C = 200 + Y If investment spending is $300 and government spending is $100, find the equilibrium level of GDP. Show graphically. (HINT:
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problem 8 - ECON 162B-A0, A1 Fall 2010 PROBLEM SET NUMBER...

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