You are using a significance level of ? = 0.05 to test a claim that p > 0.5. Your sample is a simple random sample of size n = 49. Calculate ? for the test, assuming that the true population proportion is 0.7 and showing all work. Solution --- If alpha is 5%, beta must be 95%. Cheers,.

1. You are working at an investment firm that has many investments in Lithuania. You have been
asked to do a simple simulation showing the potential effects of Lithuania building a high-speed
rail network, and what will happen if there is worldwide pressure on interest rates. All amounts
are in millions of Litas. (The Lita is the Lithuanian currency. For this example use the exchange
rate you compute, not the actual exchange rate). Government spending is projected to rise by 50
percent due to construction of the high-speed rail network
This is the status quo scenario
Total Output is equal to 5,000
Government spending is equal to 1,000
Tax revenue is equal to 1,000
Consumption is equal to 250+0.75*(Y-T);
The level of investment is 1,000-50r;
Net Exports are 500-500?,
the world real interest rate is five percent Assume that there are three political parties in
Lithuania and each think that building the high speed rail network will have different effects on
the economy. They have hired you as a consultant (moonlighting from your investment firm) to
do an analysis showing what happens if their beliefs end up being true
a. THE LIBERAL PARTY believes that increasing government spending to build the high
speed rail network will increase both G and GDP. That is G, will increase to 1,500 and GDP will
increase by 500 too. Compare what happens to the economy (relative to the status quo) if the
Liberal party is correct. How do private savings, public savings, national savings, investment, net
exports, and the exchange rate change from the status quo?
b. THE CONSERVATIVE PARTY believes that building a high speed rail network will put
people to work (thus increasing G), but that it will ultimately be useless (there will be no overall
wealth created), so GDP will be unchanged. The conservatives are also concerned that the
government taking on new debt will be a bad sign to Lithuanias creditors, and that borrowing the
money for the high-speed rail system will cause the interest rate to rise 20 percent. Under this
scenario, how do private savings, public savings, national savings, investment, net exports, and
the exchange rate change from the status quo?
c. THE LIBERTARIAN PARTY believes that taking tax money and using it to build a high-
speed rail network does nothing more than take money from one group of people (taxpayers) and
give it to another group of people (the construction industry) and that there is no productive
economic impact. How do private savings, public savings, national savings, Net exports, and the
exchange rate change from the status quo?
d. Please compare situations a, b, and c. Who do you think is correct, and why?

2. e. The Libertarians use a microeconomics explanation about taxation to argue that the economy
will be helped most by simply reducing taxes, even if people only save the money that they dont
spend on taxes (C is not affected). They say that this phenomenon is assumed away by most
macro-economists. What are they referring to?
Solution
a. Y = 5000 G = 1000 T = 1000 C = 250 + 0.75*(Y-T) I = 1000 – 50r Net Exports = 500 - 500 r
= 0.05 New G = 1500 and Y = 5500 Private Saving = Disposable income – consumption Private
Saving = (Y – T) – Consumption Private Saving = (Y – 1000) – (250 + (0.75Y – 750)) Private
Saving = 0.25Y – 1250 + 750 Private Saving = 0.25*5500 – 500 Private Saving = 1375 – 500
Private Saving = 875 Public Saving = Excess of Taxes over Government expenditure Public
Saving = T – G Public Saving = 1000 – 1500 Public Saving = – 500 National Saving = private
saving + public saving National Saving = 750 + (– 500) National Saving = 250 National Saving
= Domestic Investment + Foreign Investment 250 = 750 + Foreign Investment Foreign
Investment = – 500 means, Net Export = – 500 Net Export = 500 - 500 – 500 = 500 - 500 = 2
b. Private Saving = Disposable income – consumption Private Saving = (Y – T) – Consumption
Private Saving = (Y – 1000) – (250 + (0.75Y – 750)) Private Saving = 0.25Y – 1250 + 750
Private Saving = 0.25*5000 – 500 Private Saving = 1250 – 500 Private Saving = 750 Public
Saving = Excess of Taxes over Government expenditure Public Saving = T – G Public Saving =
1000 – 1000 Public Saving = 0 National Saving = private saving + public saving National Saving
= 750 + 0 National Saving = 750 National Saving = Domestic Investment + Foreign Investment
750 = 750 + Foreign Investment Foreign Investment = 0 means, Net Export = 0 Net Export =
500 - 500 0 = 500 - 500 = 1
c. Private Saving = Disposable income – consumption Private Saving = (Y – T) – Consumption
Private Saving = (Y – 1000) – (250 + (0.75Y – 750)) Private Saving = 0.25Y – 1250 + 750
Private Saving = 0.25*5000 – 500 Private Saving = 1250 – 500 Private Saving = 750 Public
Saving = Excess of Taxes over Government expenditure Public Saving = T – G Public Saving =
1000 – 2000 (G = 2000) Public Saving = -1000 National Saving = private saving + public saving
National Saving = 750 + (-1000) National Saving = -250 National Saving = Domestic
Investment + Foreign Investment -250 = 750 + Foreign Investment Foreign Investment = -1000
means, Net Export = -1000 Net Export = 500 - 500 -1000 = 500 - 500 = 3
d. By comparing the views of liberal, conservative and libertarian party, I think that the
conservative view is correct. The calculated numerical values of private saving, public and
national saving, net export and exchange rate indicates that the conservative view is correct.
e. Of course, the economy will be helped most by simply reducing taxes. In practical, most of the

3. people are not voluntarily paying taxes to the government however their spending on goods and
services takes place with taste and preferences also. Technically, reduction in taxes will allow
increasing the disposable income of the individuals and this will influence to increase their
spending amount. A positive change in spending will attract the new investment and push up the
employment and fasten the activities of all economic indicators.