Question

• Consider an economy described as follows: Y 5 C 1 I 1 G. Y 5 8,000. G 5 2,500. T 5 2,000. C 5 1000 1 2/3(Y2T ). I 5 1,200 2 100r. a. In this economy, compute private saving, public saving, and national saving. b. Find the equilibrium interest rate. c. Now suppose that G is reduced by 500. Compute private saving, public saving, and national saving. d. Find the new equilibrium interest rate

Answer 1

$$C=1,000+\frac{2}{3}Y-T$$

$$C=4,333$$

$$I=Y-C-G=1,167$$

$$1,167=1,200-100r$$

$$r=0.33$$

If G=2,000

$$I=1667$$

$$r=0.4$$