Suppose that the consumption function in the economy is C = 60 + 0.5Y 100r, where C is consumption, Y is output, and r is the real interest rate. Government purchases equal 124, and full-employment output is 640. The desired level of investment in the economy at the current real interest rate is 144 units.

a) (5 points) Assuming a closed economy, if the goods market is in equilibrium at the given values, what is the market-clearing real interest rate? Answer

(Do not use the percentage sign, i.e. type 0.05, not 5%)

b) (2 points) Suppose that the depreciation rate of capital, d, is 10% per period and the price of a unit of capital, pK, is 1 unit of output. What is the user cost of capital for the real interest rate that you found in part (a)? Answer

c) (4 points) The economywide expected future marginal product of capital is MPKf = 39.78 0.2Kf, where Kf is the future capital stock. What is the desired level of capital stock for the economy? Answer

d) (4 points) What is the existing capital stock in the economy for the given level of desired investment?