Question: suppose output is determined by where a represents technology levels...
Suppose output is determined by
where A represents technology levels, K is capital, and L is labor. Suppose that A=10, K=100, and L=25.
Demand for investment funds is given by
where r is the interest rate. (Note: If r is 5% than r=.05)
Consumers save more (ie consume less) when the interest rate is high. So consumption is given by
The government consumes G=100.
- What is the level of output in this economy?
- What is the equilibrium level of the interest rate?
- How is output divided between C, I, and G at equilibrium?
- How would your answers to parts a-c change if government consumption rose to 150? In two sentences explain intuitively what is (and isn’t) going on as the government consumes more.