MID_sample

# R is the real interest rate in percent taxes t are

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r is the real interest rate in percent. Taxes ( T ) are 100 and government spending ( G ) is 150 (a) [3 points] What is the equilibrium value of r ? (b) [3 points] What are the equilibrium values of C and I ? (c) [3 points] Now assume government purchases increase by 50 to 200. What are the new equilibrium values of C , I , and r ? (d) [3 points] Now assume that we start again at G = 150. Suppose a government education program succeeds in getting households to save more. It lowers marginal propensity consume (MPC) to 0.60. What is the new equilibrium value of r ? (e) [3 points] Suppose that both government purchases ( G ) and taxes ( T ) increase by 100. Is r increasing or decreasing? Briefly explain (2) [10 points] Classical Model in the Long Run Use the Classical Model to answer the following questions. Be sure to label: i) the axes; ii) the curves; iii) the initial equilibrium values; iv) the direction curves shift; and v) the terminal equilibrium values (a) [6 points] During early 1980s, President Reagan proposed to increase defense spending and decrease taxes. Table 1 shows how the policies affected the U.S. economy. Use the classical model and illustrate graphically how the model predicts national saving ( S ), investment ( I ), and real interest rate ( r ) in the long run 2

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(b) [4 points] Are the data in the table consistent with model predictions that you found in part (a)? Briefly discuss (3) [18 points] Solow-Swan Growth Theory Use the Solow-Swan growth model to answer the following questions. Be sure to label: i) the axes; ii) the curves; iii) the initial equilibrium values; iv) the direction curves shift; and v) the terminal equilibrium values Case I: Growing Population and No Technological Progress Suppose that two countries are exactly alike in every respect except that population grows at a faster rate in country A than in country B. That is, the population growth rate in country
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