Question

In: Economics

An economy has full-employment output of 2400. Government purchases are 100 and taxes are 100. Desired...

An economy has full-employment output of 2400. Government purchases are 100 and taxes are 100. Desired consumption and desired investment are given by

C^d = 100 + 0.6(Y-T)

I^d = 100 – 240r

where Y is output and r is the expected real interest rate.

Find the real interest rate that clears the goods market. Assume that output equals full-employment output.

Calculate the amount of public saving, private saving, National saving, investment, and consumption in equilibrium.

Expert Solution

a) Y = C + I + G

2400 = 100 + 0.6(2400 - 100) + 100 - 240r + 100

2400 = 100 + 1440 - 60 + 100 - 240r + 100

240r = 1680 - 2400

240r = - 720

r = - 3%

b) Private saving = Y - T - C = 2400 - 100 - (100 + 0.6(2400 - 100)) = 2300 - 100 - 1380 = 2300 - 1480 = 820

Public saving = T - G = 100 - 100 = 0

National saving = Private saving + Public saving = 820 + 0 = 820

Investment = 100 - 240(-3) = 100 + 720 = 820

C = 100 + 0.6(2400 - 100) = 100 + 1380 = 1480

Rahul Sunny answered 2 years ago

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