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Question: suppose output is determined by where a represents technology levels...

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Suppose output is determined by

Y=Asqrt{k}sqrt{L}

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

100-1000 r

where r is the interest rate.  (Note: If r is 5% than r=.05)

C400-1000 * r

Consumers save more (ie consume less) when the interest rate is high.  So consumption is given by

The government consumes G=100.

  1. What is the level of output in this economy?

  1. What is the equilibrium level of the interest rate?

  1. How is output divided between C, I, and G at equilibrium?

  1. 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.

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