Assume that output is defined by K0.5 (EL) 0.5, where K denotes capital, L denotes labour, E denotes labour efficiency; K = 400, L = 100, E = 900

Question

Consumption (C) is given by the equation:
C = 500+0.5(Y - T)
Investment (I) is given by the equation:
I = 3500 - 500r,
where r is the real rate of interest in percent.
Taxes (T) are 1000 and government spending (G) is 500.
a. Calculate the value of output (Y), marginal product of capital and marginal product of labour.
b. Is there a budget deficit or a budget surplus?
c. What are the equilibrium values of consumption(C), private saving, public saving, and national saving?
d. What are the equilibrium values of investment (I) and interest rate (r)?
e. If the government increases the level of public spending to 1000, what are the new equilibrium values of consumption(C), private saving, public saving, national saving, investment (I), and interest rate (r)?