Y = C(Y T ) + I(r) + G Y = F(K,L) M/P = L(r+^e, Y) C(Y T) is describing consumptions as a function of disposable income, K and L are fixed and do not change over time, G and T are chosen by government. And ^e are exogenous and fixed. Suppose K = 150 , L = 500, C = 12 +0.7(Y-T), Y = 2.5*K^*L^(1-), G=250, T=250, P = 1, =0.3, I=60 400r Lets consider a balanced budget expansion, government spending increases by 10, Taxes increase by 10. Calculate : a. Change in consumption: b. Change in total savings : c. Calculate the new interest rate: d. Draw the change from savings 1 to savings 2 and show how it causes the interest rate to change (bonus points if you draw the curves with the correct values and show them for S1,S2, I and r1 and r2).

1. Y = C(Y T ) + I(r) + G
Y = F(K,L)
M/P = L(r+^e, Y)
C(Y T) is describing consumptions as a function of disposable income, K and L are fixed and do
not change over time, G and T are chosen by government. And ^e are exogenous and fixed.
Suppose K = 150 , L = 500, C = 12 +0.7(Y-T), Y = 2.5*K^*L^(1-), G=250, T=250, P = 1, =0.3, I=60
400r
Lets consider a balanced budget expansion, government spending increases by 10, Taxes
increase by 10. Calculate :
a. Change in consumption:
b. Change in total savings :
c. Calculate the new interest rate:
d. Draw the change from savings 1 to savings 2 and show how it causes the interest rate to
change (bonus points if you draw the curves with the correct values and show them for S1,S2, I
and r1 and r2)