What were the equilibrium levels of the real interest rate

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Due to its remoteness, Siberia can be considered as a closedeconomy. Recent data about its popula- tion movements indicate thatthe region suffered from a severe loss in its working agepopulation from 1995 to 2005. As a consequence full employmentoutput declined from Y1995 = 100 to Y 2005 =90. This question asks you to analyze the long-run implications ofdifferent fiscal policies available to Siberian officials. Theeconomy can be described as follows:

C(r) = 10 + 0.6Y -1000r (14)

I(r) = 50 -1000r (15)

G =20 (16)

(a) What were the equilibrium levels of the real interest rate,consumption and investment in 1995?

(b) In 2005 government officials consider changing governmentexpenditures in order to keep in- vestment at the same level as itwas in 1995. What must the value of G be to implement thispolicy?

(c) The second policy under consideration is to alter governmentexpenditures in order to maintain private consumption at its 1995level. What must the value of G be in this case?

Reference no: EM13244728

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