Question

Consider a closed economy described by the following:

Y = 2,000

G = 700

T = 500

C = 100 + 0.6(Y – T)

I = 750 – 50r

a.       Find consumption.

b.       Find the equilibrium interest rate.

c. Find investment.

d. Find private saving, public saving, and national saving.

Answer 1

a) C = 100 + 0.6 * (Y - T) = 100 + 0.6 * (2,000 - 500) = 1,000

b) In a closed economy Y = C + S and S = I

2,000 = 100 + 0.6 * (Y - T) + S

S = 2,000 - 100 - 0.6 * (2,000 - 500) = 1,000

S = I

1,000 = 750 - 50r

r = -5

c) I = 75 - 50 * -5 = 1,000

d) Private saving = Y - C - T = 2,000 - 1,000 - 500 = 500

Public saving = T - G = 500 - 700 = -200

National saving = Private saving + Public saving = 500 - 200 = 300