Question 2 (25 points) Topic 2 A closed economy can be described by the long-run classical model: v=v=uiw c = 7,000 + 0.8(Y T) 150r I(r) = 4,600 SOr Note: r is measured in percentage points (i.e., if r = 5, then r = 5%). Keep your answers to 3 decimal points if needed. In this economy, there are two productive factors, K and L and both factor inputs are fully employed. The economy is endowed with 10,000 units of capital and labour respectively. Initially, the government collects one-fth of output as income taxes, and it runs a budget surplus of 2,000. a) Compute the long-run equilibrium levels of consumption, national savings and real interest rate. Also, nd the long-run equilibrium real wage for labour and real rental price of capital. (5 points). Recently, there are downward adjustments in the stock market, as such autonomous consumption changes by 14%. At the same time, the government provides a tax relief to households and the amount of taxes collected drop by 14%. Hint: You need decide whether autonomous consumption increases or decreases. b) Find the new long-run equilibrium levels of consumption, real wage, and real rental price of capital. (4 points) c) Compare your answers in parts (a) & (b), what happens to the (equilibrium) level of consumption? (i.e., increasefdecreasefremain unchanged)? Explain, in words only, why the variable changes or remains unchanged. (4 points) d) Show your answers for parts (a) 8: (b) in three diagrams (that depict the loanable funds market, the labour market, and the rental market for capital in long-run equilibrium). Be sure to identify which points on your diagrams are the long-run equilibria for part (a) 8: (b) respectively. No written explanation is required. (6 points) e) Suppose the government nds the change in real interest rate in part (b) undesirable and wants to keep to it at 17% via a change in government spending. Find the level of government spending that could achieve the goal. Comparing to your answer in part (b), what happens to the size of the budget balance (increase, decrease, or no change)? (6 points)