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Consider an economy in which the consumption, investment and production functions are as follows. C = 90+0.7(Y-T) I = 250 - 20r F(K, L)

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Consider an economy in which the consumption, investment and production functions are as follows. C = 90+0.7(Y-T) I = 250 - 20r F(K, L) = AK/2 [1/2 The capital and labor supply are equal to 100 each, A=10, G = 200 and T = 200. Compute the equilibrium values of output, overall labor income, consumption, public savings, national savings, investment, and the interest rate. Suppose now government spending increases to G=250 (everything else stays the same). What happens to output, consumption, savings, investment and the interest rate? Compute the new values for these variables.

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