Hw3ak - Student Name Sonoma State University Department of...

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

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* =

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 3

Hw3ak - Student Name Sonoma State University Department of...

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

View Full Document
Ask a homework question - tutors are online