2. Goods Market with Government (27 pts) Suppose you are given a standard setup with government spending. Recall our GDP identity, we will also treat government spending as exogenous Y = Cd + Id+ G For national savings recall this is: sd = Y - C'd - G For the following economy has full employment output of 1000 from the labor market. Goverment purchases G are 1000. Desired Consumption and desired investment are given by the following functions C'd = 250 - 500r + 0.5(Y - T) Id = 250 - 500r Where Y is output and r is the real interest rate (in decimal form), and T is lump sum taxes from the government. You may assume that G = T (In this case we are assuming no impact in the labor market due to changes in government spending) (a) (5 pts) Find an equation relating national savings Sd, to r and Y and T and G (b) (6 pts) Suppose that government spending is 200. Using the following goods market equilibrium condition, Y = Cd + Id + G , find the real interest rate that clears the money market. (c) (5 pts) To check your work in part (b), use the real interest rate you calculate in part (b) to solve for what government spending MUST be satisfy the other way of writing the market clearing condition which is Sd = Id. (d) (5 pts) Suppose that Government purchases rise to 300. How does this decrease change the equation describing desired national savings? What is the new equilibrium interest rate r? (e) (6 pts) Graph the impact in the goods market of the decrease to government savings. Clearly label the old and new equilibrium quantities. What is the new equilibrium quantity of Consumption and Investment