Question

Kirkland is a small country described by the following, Y =8000;G=2500;T =2000;
C = 1000 + .66(Y − T )
I = 1200 − 100r
Y =C+I+G
(a) For Kirkland, compute private saving, public saving and national
saving?
(b) Find the equilibrium interest rate?
1
(c) Suppose G is reduced by 500, compute private saving, public sav- ing and national saving?
(d) Find the new equilibrium interest rate?

Answer 1

(a) For Kirkland, compute private saving, public saving and national

saving?

$\text{Public saving = T - G}$

$\text{Public saving} = 2000-2500=-500$

$\text{Private saving = Y -T -C}$

$\text{Private saving}=8,000 - 2,000 - (1000 + 0.66 * (8,000-2000)$

$\text{Private saving}=1040$

$\text{National savings = Private savings + Public savings}$

$\text{National savings}=1040-500=540$

(b) Find the equilibrium interest rate?

The equilibrium position stipulates that:

$\text{ Equilibrium, Y = C+ I + G}$

$8,000 = (1000 + 0.66 * (Y-T)) + 2,500 + 1,200 - 100r$

$8,000 = (1000 + 0.66 * (8000-2000) + 2,500 + 1,200 - 100r$

$100r=8660$

$r=\dfrac{8660}{100}=8.66$

(c) Suppose G is reduced by 500, compute private saving, public saving and national saving?

By reducing G by 500 the new G will be 200.

The public investment will be:

$\text{Public saving = T - G}=2000-2000=0$

The private investment will be:

$\text{Private saving}=8,000 - 2,000 - (1000 + 0.66 * (8,000-2000)$

The national savings will therefore, be:

$\text{National savings}=1040-0=1040$

(d) Find the new equilibrium interest rate?

$8,000 = (1000 + 0.66 * (Y-T)) + 2,000 + 1,200 - 100r$

$8,000 = (1000 + 0.66 * (8000-2000) + 2,000 + 1,200 - 100r$

$100r=160$

$r=\dfrac{160}{100}=1.6$