Consider the Savings-Investment model involving: The Savings function: S = S0+s1Y+s2r; and the Investment function: I = I0+ir; where: Y = GDP, r = interest rate; and equilibrium occurs when Savings equal Investment. (i) Solve for the equilibrium GDP Y* (ii) Using your Y*, find the Investment-Multiplier dY*/dI0
Consider the Savings-Investment model involving: The Savings function: S = S0+s1Y+s2r; and the Investment function: I = I0+ir; where: Y = GDP, r = interest rate; and equilibrium occurs when Savings equal Investment. (i) Solve for the equilibrium GDP Y* (ii) Using your Y*, find the Investment-Multiplier dY*/dI0
Chapter1: Making Economics Decisions
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Problem 1QTC
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Consider the Savings-Investment model involving:
The Savings function: S = S0+s1Y+s2r; and the Investment function: I = I0+ir;
where: Y =
(i) Solve for the equilibrium GDP Y*
(ii) Using your Y*, find the Investment-Multiplier dY*/dI0
Expert Solution
Step 1
S=S0+s1Y+s2r
I=I0+ir
(i) Equilibrium occurs when Savings equal Investment:
S=I
S0+s1Y+s2r=I0+ir
s1Y=I0+ir-S0-s2r
s1Y=I0-S0+r(i-s2)
Y*=[I0-S0+r(i-s2)]/s1
Equilibrium GDP : Y*=[I0-S0+r(i-s2)]/s1
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