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 ago
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