Question6 Consider the following economy YCIG Y 8000 G 200

Question-6: Consider the following economy Y=C+I+G Y = 8000, G = 2000, T = 1500 C=1000 + 2/3 (Y-T) 1 = 1200-100r a. Compute private saving, public saving, and national saving. b. Find the equilibrium interest rate. c. Now suppose government increases G by 500. Compute new private saving, new public saving, and new national saving. d. Find the new equilibrium interest rate.

Solution

(a) PRIVATE SAVING : Y - T - C

Private saving = 8,000 - 1500 - [ 1000 + 2/3 (8000-1500)]

= 6500 - [ 1000 + 2/3 (6500)]

= 6500 - [1000 + 2(2166.66)]

= 6500 - [ 1000 +4333.32]

= 6500 - 5333.32

= 1166.68

PUBLIC SAVING : T -G

Public saving = (1500 -2000)

= -500

NATIONAL SAVING : Public saving + Private saving

National saving =( -500 + 1166.68)

= $ 666.68

(b) To calculate equilibrium interest rate , equate national savings with investment.

National saving = Investment

666.68 = 1200 - 100r

100r = 1200 - 666.68

r = 5333.32/100

r = 5.3%

(c) Suppose government spending increases , G by 500.

New private saving would be the same because it doesn\'t include G in calculation. So, new private savings = 1166.68

New Public savings = T-G

Now, G = 2500

New public savings = 1500 - 2500

= - 1000

New National savings = Public savings +private savings

= -1000 + 1166.68

= 166.68

(d) New equilibrium interest rate ,

New national savings = Investment

166.68 = 1200 -100r

100r = 1200 - 166.68

r = 1033.32 /100

r = 10.33 %