Assume that the officials in Ecoland have compiled the following information about their economy for last year:
Y = 10,000
C = 6,000
T = 1,500
G = 1,700
The government uses the following equation for the investment function:
I = 3,300 ââ?¬" 100r
Where r = equal to Ecoland's real interest rate.
Calculate, then explain, the following:
The equilibrium real interest rate
1) Private Saving
Private saving is the total amount of individuals (i.e. the citizens) save. Obviously, saving is what you earn take away taxes and take away what you spend. So it should be Private saving = disposable income - consumption. Disposable income is the amount of money available to you to spend, this is income minus taxes. You are able to spend either parts of all of your disposable income (and in some cases, you are able to spend more).
Disposable income = income - tax = Y - T = 10,000 - 1,500 = 8,500
Private saving = 8,500 - 6,000 = 2,500
2) Public ...