In an economy, desired consumption and investment are given bycd=5,000+ 0.20Y-4,500r= 2,400 4,000rwhere Y is output and r is the real interest rate.Government purchases are G = 2,100.The equation for desired national saving is given by:S=7,100+ 0.80Y+ 4,500r.When Y=10,000, the equilibrium rate of interest is calculated to be r = 18%.When Y= 10,200, the equilibrium rate of interest is calculated to be r = 16%.These equilibrium output and interest rate combinations are used to draw the initialIS curve labeled /S1.Now the level of government purchases increases to 2,600. Determine the equationfor the new saving function:S = +Y+r.☐

Approach to solving the question: Begin by defining the desired consumption function, represents the…

Answered: In an economy, desired consumption and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Our closed economy has a production function Y = A•F(K,LxE), where Y, K, L, E & A all have their usual meanings as per our lectures & course textbook. Also, this production function exhibits all the usual mathematical/economic properties we usually assume: positive marginal products, diminishing marginal products, complementarity between K & (LxE), and constant returns to scale. The aggregate consumption function depends negatively on the real interest rate, the government budget is balanced initially & the economy is in both a long-run equilibrium and steady state initially. The population growth rate is 2% per year, capital depreciates at a rate of 3% per year, the saving rate is 25% and technology is constant. Suppose the level of labour effectiveness (E) suddenly permanently rises by 10%. a) Use the long-run classical model to determine the qualitative impact of this shock on the long-run equilibrium levels of real output, consumption, investment, real interest…

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