Question

2. The country, Hoosier (a closed economy), has the following data: GDP: Y = 1200, Consumption: C = 600 – 10,000 r, Taxes: T = 200, Government purchases: G = 300. The investment is I = 700 – 10,000 r a. Use the information above to find the supply and demand equations for loanable funds: i. Supply equation: ii. Demand equation: _ b. What is the equilibrium interest rate, r, and what are national saving and investment, S and I? c. Find the following at the equilibrium loanable funds (saving and investment: i. Consumption: 11. Private saving: Public saving: iv. List 2 policies the Hoosier government could do to increase investment

Answer 1

(a) National saving (S) = Y-C-G

S = 1200 - (600 -10000 r) - 300

S = 1200 - 600 + 10000r - 300

S = 300 + 10000r (Loanable funds supply equation)

Investment function is the demand of loanable funds.

I = 700 - 10000r (Loanable funds demand equation)  

(b) At equilibirum point S=I

Set, S = I

300 + 10000r = 700 - 10000r

10000r + 10000r = 700 - 300

20000r = 400

r = (400 / 20000)

r = 0.02 (equilibrium interest rate)

S = 300 + 10000r

S = 300 + 10000 (0.02)

S = 500 (equilibrium national saving )

I = 700 - 10000r

I = 700 - 10000 (0.02)

I = 500 (equilibrium investment)

(c)

(i) Consumption: C = 600 - 10000r

C = 600 - 10000(0.02)

C = 400

Consumption is 400

(ii) Private saving = Y - C - T

Private Saving = 1200 - 400 - 200

Private Saving = 600

(iii) Public Saving = T - G

Public Saving = 200 - 300

Public saving = -100

(iv) Government can give tax breaks to industries to increase the investment.

The government can give a subsidy in the production of goods in which they want to increase the investment.