Final answer:
The student asks for the calculation of long-run shares of GDP given a change in government spending from 20% to 17%. Adjustments to the other components will be necessary to maintain the total shares adding up to 1.
Step-by-step explanation:
The student is asking for the determination of long-run shares of spending in GDP when the government share changes from 20 percent to 17 percent.
To find the new long-run shares of the components of GDP (C, I, X, G), we must first change the G/Y* equation to reflect the new government spending share, which is now 0.17 instead of 0.2. The equations provided are:
- C/Y* = 0.7 – 0.2(R - .05)
- I/Y* = 0.2 – 0.8(R - .05)
- X/Y* = 0.0 – 0.95(R - .05)
- G/Y* = 0.2 (this will change to G/Y* = 0.17)
To maintain the balance that the total shares must add up to 1 (or 100%), a decrease in G/Y* implies the other components must adjust accordingly.