Apply the classical theory. Consider a hypothetical economy described below: Y=C+I+G C = 50+cY - T I = 300 - 20r Y = 2,000 T = 900 G = 1,500 c = 0.6 where Y is output, C is consumption, I is investment, G is government purchases, T' is taxes, and r is real interest rate in percent. b) Find the equilibrium interest rate. (.. c) Suppose taxes are reduced by 80. First, calculate private saving, public saving, and national saving. Second, find the new equilibrium interest rate. Third, draw a graph that shows the change in the equilibrium. (¯¯ ----- d) Instead of reducing taxes by 80, suppose government purchases are increased by 80. First, calculate private saving, public saving, and national saving. Second, find the new equilibrium interest rate. Third, draw a graph that shows the change in the equilibrium. ( e) Why is the change in national saving larger in (d) than in (c) even if the magnitude of the change in fiscal policy in (c) and (d) are the same?
Apply the classical theory. Consider a hypothetical economy described below: Y=C+I+G C = 50+cY - T I = 300 - 20r Y = 2,000 T = 900 G = 1,500 c = 0.6 where Y is output, C is consumption, I is investment, G is government purchases, T' is taxes, and r is real interest rate in percent. b) Find the equilibrium interest rate. (.. c) Suppose taxes are reduced by 80. First, calculate private saving, public saving, and national saving. Second, find the new equilibrium interest rate. Third, draw a graph that shows the change in the equilibrium. (¯¯ ----- d) Instead of reducing taxes by 80, suppose government purchases are increased by 80. First, calculate private saving, public saving, and national saving. Second, find the new equilibrium interest rate. Third, draw a graph that shows the change in the equilibrium. ( e) Why is the change in national saving larger in (d) than in (c) even if the magnitude of the change in fiscal policy in (c) and (d) are the same?
Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?
Section9.A: The Simple Algebra Of Income Determination And The Multiplier
Problem 4TY
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