Questions:

Consider Covidstan has the following characteristics:

Y=F(K,L)=10(KL)1/2, MRK (Marginal Product of Capital)=5(K/L)1/2,K=400,L=100,C=260+0.8(YT),I=2305r,NX=XIM=0,G=100,T=200and output is determined by the equation Y=C+I+G+NX.

What is the level of national income (Y) in this economy? How much of the national income goes to the workers and how much to the capital owners? How much does the households save? How much doe the government save?

Find the equilibrium interest rate in the market?

Assume covid reduces the labour force to 81. Remaining consumers become cautious so change their consumption to C=240+0.8(YT). Using a Keynesian cross diagram show what happens to GDP and calculate the new interest rate.