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Transformation of its population preferences

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Suppose the economy of GiedtVille is seeing a transformation of its population's preferences. Currently, its economy is described by the following equations.

Y = 3K0.3L0.9 G = 60

I = 120 - 100r

K = 50 and L = 50 T = 80

C = 40 + 0.5(Y - T)

  1. a) Does GiedtVille's production function exhibit constant returns to scale?
  2. b) Assuming GiedtVille is a closed economy, what are the equilibrium values of consumption, investment and the interest rate?
  3. c) Suppose GiedtVille's people decide to consume less so that their new consumption function is C
  4. = 10 + 0.5(Y - T). Re-solve for the new equilibrium values of consumption, investment, and the interest rate in GiedtVille.
  5. d) Sketch a loanable funds diagram for GiedtVille that shows the effect of the change from part b) to part c) on national saving and investment.
  6. e) Briefly explain the economic intuition behind what is causing the change in the interest rate between part b) and part c). 

Reference no: EM131833444

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