Consider an economy described by the following equations:Y = C+I+GY = 5000G = 1000T = 1000C = 250 + 0.75(Y-T)I = 1000 - 50rIn this economy, compute private saving, public saving, and national saving.Find equilibrium interest rate.Now suppose that G rises to 1250. Compute private saving, public saving, and national saving.Find the new equilibrium interest rate.Using your knowledge of Macroeconomics and intuition explain the reason why increasing government expenditure causes interest rate to rise?If the government wants to increase the amount of savings in the economy, how should it alter government spending? What effect will this action have on the interest rate in the economy?

1. Private saving= Y-T-C Y=5000 T=1000 C=250-0.75(5000-1000) Private Saving=…

Answered: Consider an economy described by the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider an economy described by the following equations:

Y = C+I+G

Y = 5000

G = 1000

T = 1000

C = 250 + 0.75(Y-T)

I = 1000 - 50r

In this economy, compute private saving, public saving, and national saving.
Find equilibrium interest rate.
Now suppose that G rises to 1250. Compute private saving, public saving, and national saving.
Find the new equilibrium interest rate.
Using your knowledge of Macroeconomics and intuition explain the reason why increasing government expenditure causes interest rate to rise?
If the government wants to increase the amount of savings in the economy, how should it alter government spending? What effect will this action have on the interest rate in the economy?

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