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A firm that uses two inputs to produce output has the production function 3x1/3y1/3, where x is the amount of input 1 and y is the amount of input 2. The price of output is 1 and the prices of the inputs are wx and wy. The firm is constrained by the government to use exactly 1000 units of input 1.
A. Explain how much of input 2 does it use?
B. Illustrate what is the most that it is willing to bribe an inspector to allow it to use another unit of input 1?
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The economy of a country called Econoland is described by the following desired aggregate expenditure components (all figures in billions of $). For the purposes of this question, the first set of equations will be referred to as fiscal policy1.
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Explain how do governments borrow funds to finance deficit spending. What is likely to happen to interest rates in the market.
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