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 a. Use the information above to find the supply and demand equations for loanable funds: (i) Supply equation: 360 + 10,000+ sex theri um ii. Demand equation: 300 - 10.000 equat to b. What is the equilibrium interest rate, r, and what are national saving and investment, S and I? 8=.02 , S I -100007 +300+ 700-10,000 c. Find the following at the equilibrium loanable funds (saving and investment: 400 i. Consumption: ii. Private saving: Public saving: iv. List 2 policies the Hoosier government could do to increase investment Increase tares or decrease give incentives to firms that Government purchases are willing to invest.

Answer 1

a.i) On the supply side, GDP=Y = 1200

ii) On the demand side, C+I+G = 600-10,000r+700-10,000r+300 = 1600-20,000r

b. For equilibrium,

Demand = Supply

1200 = 1600-20,000r

or, 20,000r=400

or, r = 0.02% is the equilibrium interest rate

Then, C= 600-(10,000*0.02) = 400

National savings S = Y-C-G = 1200-400-300=500

and I = 700-(10,000*0.02) = 500

c. i) C=500 (from b)

ii) Private savings = Y-T-C = 1200-200-500 = 500

iii) Public savings = T-G = 200-300 = -100

iv) Two policies that government can apply to increase investment are:

a. decrease rate of interest.

b. increasing savings (by decreasing consumption).