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…

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?

Section9.A: The Simple Algebra Of Income Determination And The Multiplier

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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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