Hw3ak - Student Name:_ Sonoma State University Department...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Student Name:_____________________________________________________ Sonoma State University ECONOMICS 304 Department of Economics Florence Bouvet Assignment 3-Answer Key 1) To address the current budget deficit, Congress is debating whether to implement a cut in government spending. Suppose you are a policy analyst working for the Congressional Budget Office, and it is your job to analyze the macroeconomic effects of a permanent cut. Suppose you have worked out the following very simplified model to characterize basic features of the U.S. economy: Y = 2,000 G = 400 T = 200 I = 800 – 10,000r Investment function C = 500 + 0.5(Y-T) Consumption function a) First find the equilibrium levels of the interest rate, investment and consumption for the economy described for the equations above. (Use Y = C + I + G, where we assume a closed economy.) Show your work! Using the equilibrium condition for goods market (Y = C + I + G), we can obtain: 2000 = 500 + 0.5 (2000 – 200) +800 – 10,000r + 400. 2000 = 2600 – 10000r By solving for r from this equation, the equilibrium level of the interest rate is r* = 0.06 or 6% Given r* = 0.06, I* =
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

Hw3ak - Student Name:_ Sonoma State University Department...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online