Question

Consider the UNILUS economy in the long-run described by the following equations:

Y = C + I + G, Y = 5,000, G = 1,000, T = 1,000, C = 250 + 0.75(Y − T), I = 1,000 − 50r;

A. Compute private saving, public saving, and national saving.

(5 Marks)

B. Find the equilibrium interest rate. (5 Marks)

C. Now suppose that G rises to 1,250. Compute private saving, public saving, and national savings. (5 Marks)

D. Find the new equilibrium interest rate. (5 Marks)

Answer 1

$Private savings (S) = Y – T – C$

$= 5000-1000 -( 250 + 0.75(5000-1000)$$= 4000-3250$

$= 750$

$Public savings = (T − G)$

$1000- 1000$

$= 0$

$National Savings = private savings + Public savings$$= 750+0= 750$