Consider a closed economy operating according to the Classical model. The production function is: Y = 40K^0.75L^0.25
Problem 1 - Use the following information to answer questions 24-29
Consider a closed economy operating according to the Classical model. The production function is Y = 40K^0.75L^0.25, where K and L are the capital and labor used in the production of output Y. The consumption and investment functions are: C = 100 + 0.8(Y - T) and I = 1,450 - 20r, where T is the amount of taxes and r is the real interest rate. You know that the stocks of the factors of production in this economy are: K = 256 and L = 81. In addition, you know that taxes are T = 530 and Government spending is G = 480. Recall that if an economy produces output according to the Cobb-Douglas production function Y = AK^L^1, then MPL = 1 - AK^L^ and MPK = AK^-1L^1.
25. The share of National income paid to capital in this economy is:
a) 5,760 b) 3,240 c) 1,920 d) 5,820
26. The amount of Private savings in this economy is:
a) 50 b) 1,280 c) 1,330 d) 1,450
27. The equilibrium real interest rate in this economy is:
a) r = 2.5 b) r = 3.5 c) r = 4 d) r = 10
28. Assuming that everything else remains unchanged, which of the following would decrease the equilibrium interest rate r?
a) A change in the investment function from I = 1,450 - 20r to I = 1,600 - 20r.
b) An increase in government spending from G = 480 to G = 540.
c) A change in the consumption function from C = 100 + 0.8Y - T to C = 100 + 0.65Y - T.
d) A decrease in the stock of capital from K = 256 to K = 200.
