Question
In: Economics
Consider an economy described by the following equations: Y = C + I + G Y...
Consider an economy described by the following equations:
Y = C + I + G
Y = 5000
G = 1000
T = 1000
C = 250 + .75 (Y - T)
I = 1000 - 50r
a. In this economy, compute private saving, public saving, and
national saving
b. Find the equilibrium interest rate
c. Now suppose that G rises to 1250. Compute private saving, public
saving, and national saving
d. Find the new equilibrium interest rate.
Solutions
Expert Solution
Here C = 250 + 0.75*(5000 - 1000) = 3250.
a. Private saving = Y - T - C = 5000 - 1000 - 3250 = 750. Public saving = T - G = 1000 - 1000 = 0. Hence
national saving = Private saving + Public saving = 750 + 0 = 750.
b. The equilibrium interest rate is where I = S or 1000 - 50r = 750. This gives r = 250/50 = 5%.
c. Now suppose that G rises to 1250. Private saving = Y - T - C = 5000 - 1000 - 3250 = 750. Public saving = T
- G = 1000 - 1250 = -250. Hence national saving = Private saving + Public saving = 750 + -250 = 500.
d. New equilibrium interest rate is found at
500 = 1000 - 50r
r = 500/50 = 10%.
Rahul Sunny answered 2 years agoRelated Solutions
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