Consider the following macroeconomy. All amounts are in millions (m.) of $:C = 750 + 0.8 YD I = 1200 G = 150 T = 250Calculate eqm Y and prove that I=sum of S at this equilibrium.What is meant by the “Paradox of Thrift” (POT)? Go back to the original eqm of part a. Now prove using multiplier analysis that the POT holds in this economy by assuming that the change in co is -$50 m. As part of your answer, explain “intuitively” why this paradox exists. Show what happens in the Z-Y space graph.

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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 the following macroeconomy. All amounts are in millions (m.) of $:

C = 750 + 0.8 Y_D

I = 1200

G = 150

T = 250

Calculate eqm Y and prove that I=sum of S at this equilibrium.
What is meant by the “Paradox of Thrift” (POT)? Go back to the original eqm of part a. Now prove using multiplier analysis that the POT holds in this economy by assuming that the change in c_o is -$50 m. As part of your answer, explain “intuitively” why this paradox exists. Show what happens in the Z-Y space graph.

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