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2. Assume that GDP (Y) is 5,000. Consumption (C) is given by the equation
C = 1,200 + 0.3(Y-T) – 50r where r is the real interest rate. Investment (I) is given by the equation I = 1,200 – 50r. Taxes (T) are 1,000 and government spending (G) is 1,500.
a. What are the equilibrium values of C, I and r?
b. What are the values of private saving, public saving and national saving?
c. Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,100 – 50 r. What are the new equilibrium values of C, I, and r?
d. What are the values of private saving, public saving and national saving?
Calculate the values of equilibrium Y,C,and S