Please answer the last parts 2 . (55 pointstotal) A closed economy has fullemployment level of outpu

/in /by

Please answer the last parts 2
. (55 pointstotal)    A closed economy has fullemployment level of output (Y) of 2,500. Government purchases,
G, are 300, taxes (T) are 500. Desired consumption(Cd) and investment (Id) are:
Cd = 560 + 0.5(
Y –T) -700
r
Id = 650 – 300
r a) (5 points) Solve for the desired savings function inintercept – slope form (note, the intercept is an integer). b) (5 points) Now solve for the goods market clearing interestrate. Please show all work. Draw a desired savings/investment diagram locating this initialequilibrium and point A.
A correct and completely labeled diagram is worth 20points So now we add some real world events to the model – for one, weknow from discussion in class and problem 1 that tao, the effectivetax rate on capital, has fallen significantly with the latest taxoverhaul. We also know that animal spirits are rising. On thesavings side, we mentioned that consumer confidence is high andexpected income is also high. Given these real world changes, wehave the following changes: (all else remains constant i) a change in the investment function – it is now:
Id = 660 – 300
r ii) a change in the consumption function – it is now:
Cd = 570 + 0.5(
Y –T) -700
r c) (5 points) Resolve for the goods market clearing interestrate and the associated levels of desired savings andinvestment.
Add this development to your diagram and label as pointB. d) (10 points) Explain the movement to the new equilibrium frompoint A to point B. Start with at the same r, savings does notequal investment. Give the actual numbers. At the same interestrate, which is larger, Y or C + I + G? Use this expression to arguewhy interest rates changed the way they did. When rates change,explain what happens to saving and investment (be specific) andwhy? e) (10 points) We discussed why the neutral funds rate hasfallen in the last 5 to 10 years. Why has it fallen and why is thissuch a big deal for the Fed?? f)(10 points) What has happened to the neutral funds rate as wemove from point A to point B? Is this a welcome development for theFed, why or why not?    . . .

 
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