Reference no: EM132246751

Consider a closed economy described by the following equations:

Y = C + I + G

Y = 5(K)0.3 (L)0.7

K = 1600 (4) L = 1600

G = 2500

T = 2000

C = 1000 + 2/3 (Y - T)

I = 1200 - 100r, where r is the real interest rate.

a) What is the equilibrium level of income? And, why?

b) Solve for the equilibrium interest rate (r) and the level of investment (I). The interest rate will be a whole number.

c) Solve for the real wage at equilibrium?

d) How much income goes to labor (L). And, why?

e) Suppose G increases by 500 to 3000.

i.) Solve for the new Y. What happened and why?

ii) Solve for the real wage at equilibrium?

iii.) Solve for the equilibrium interest rate.

iv.) What happens to I? And, why?