Problem
Consider an economy described as follows:
Y = K2*L where K = 10 and L = 10;
G = 2,000; T = 2,000
C = 1,000 + 0.8(Y-T)
I = 1,500 - 300r
i. In this economy, what is the level of Y produced?
ii. What is the equation for national saving?
iii. Compute the equilibrium interest rate.
iv. If taxes decline by 500, compute the new equilibrium interest rate. Also explain both graphically and verbally why the interest rate changed.