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Budget Amendment Requiring Government Spending Discussion Paper

(10) Consider an economy described as follows: Y=C+I+GY=14,000G=3,000C=1,000+0.80(Y−T)I=1,900−70r (NOTE: r is the real interest rate measured as a %; e.g., 5=5%) This economy is currently experiencing a budget deficit equal to 400 . a. In this economy, compute public saving, private saving, and national saving. b. Find the equilibrium interest rate. c. Suppose this country's legislature passes a balanced budget amendment requiring government spending to equal net taxes. Find the new equilibrium interest rate under each of the following two options: a. Option I: Balance the budget by changing taxes b. Option II: Balance the budget by changing government spending Under which option will real interest rates be higher, and investment lower? Budget Amendment Requiring Government Spending Discussion Paper
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Solution:-

a. In this economy, we can find public saving, private saving, and national saving as follows: , b. To find the equilibrium interest rate, we need to set investment equal to national saving: Budget Amendment Requiring Government Spending Discussion Paper

Explanation for step 1

c. Suppose the government passes a balanced budget amendment requiring government spending to equal net taxes. Then we have: Option I: Balance the budget by changing taxes If the government balances the budget by changing taxes, then G = T. The new public saving will be:
Hence above solution is the final solution Budget Amendment Requiring Government Spending Discussion Paper

Expert Answer

Budget Amendment Requiring Government Spending Discussion Paper (10) Consider an economy described as follows:

Y = C + I + G Y = 14, 000 G = 3, 000 C = 1, 000 + 0.80 (Y - T) I = 1, 900 - 70 r (NOTE: r is the real interest rate measured as a %; e.g., 5 = 5%)

This economy is currently experiencing a budget deficit equal to 400 . a. In this economy, compute public saving, private saving, and national saving. b. Find the equilibrium interest rate. c. Suppose this country's legislature passes a balanced budget amendment requiring government spending to equal net taxes. Find the new equilibrium interest rate under each of the following two options: a. Option I: Balance the budget by changing taxes b. Option II: Balance the budget by changing government spending Under which option will real interest rates be higher, and investment lower? Budget Amendment Requiring Government Spending Discussion Paper

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Here is the best solution for you

Solution:-

a. In this economy, we can find public saving, private saving, and national saving as follows: , b. To find the equilibrium interest rate, we need to set investment equal to national saving: Budget Amendment Requiring Government Spending Discussion Paper

Explanation for step 1

c. Suppose the government passes a balanced budget amendment requiring government spending to equal net taxes. Then we have: Option I: Balance the budget by changing taxes If the government balances the budget by changing taxes, then G = T. The new public saving will be:

Hence above solution is the final solution Budget Amendment Requiring Government Spending Discussion Paper

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