Assume That GDP (Y) Is 5,000

question 132

Essay

Assume that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 1,200 + 0.3(Y - T) -
50 r, where r is the real interest rate. Investment (I) is given by the equation I = 1,500 - 50r. Taxes
(T) are 1,000 and government spending (G) is 1,500. a.What are the equilibrium values of C, I, and r?
b.What are the values of private saving, public saving, and national saving?
c.Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 - 50r. What are the new equilibrium values of C, I, and r?
d.What are the new values of private saving, public saving, and national saving?

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Definitions:

Equilibrium Outcome

A state in a game where all players have chosen their strategies and no participant can gain by unilaterally changing their own strategy.

Prisoners' Dilemma

A scenario in game theory where individuals acting in their own self-interest pursue a course of action that does not result in the ideal outcome for any participant.

Maximin Strategy

A decision rule used in game theory and decision theory aiming to maximize the minimum payoff.

Dominant Strategies

A strategy in game theory that yields the best outcome for a player, no matter what the other players do.