Assume that GDP (Y) is 5,000. Consumption is C=1,000+.3(Y-T). Investment is I=1500-50r, where r is the real interest rate. Taxes (T) are 1,000 and government expenditures (G) are 1,500.

a). Calculate the equilibrium values of C, I, and r.
b). Calculate the equilibrium values of private saving, government saving, and total saving.
c). Now suppose that there is a technological innovation that makes businesses want to invest more, so that the new investment function is I=2,000-50r. Calculate the new equilibrium values of C, I, and r.
d). Calculate the new equilibrium values of private saving, government saving, and total saving.

Solution Preview

Assume that GDP (Y) is 5,000. Consumption is C=1,000+.3(Y-T). Investment is I=1500-50r, where r is the real interest rate. Taxes (T) are 1,000 and government expenditures (G) are 1,500.
Y = 5000
C=1,000+.3(Y-T)
I=1500-50r
T = 1000
G = 1500

a). Calculate the equilibrium values of C, I, and r.

At the equilibrium, Y = C + I + G
or 5000 = 1,000+.3(5000- 1000) + 1500-50r + ...

Solution Summary

This post finds new equilibrium values of private saving, government saving, and total saving.

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