Question #65466

Households save 12% of their total income Investment is given by� = 3500 − 10000�
The tax rate is 20% The real interest rate is 4% (r=0.4)
Government expenditures are 2500
Exports are 1900
The import rate is 18%
a. Calculate the numerical value of the following and put your answer. You can show the
graph if you are able to draw using programs.
• Current level of investment
• Equilibrium aggregate demand
• Equilibrium personal saving
• The government budget surplus or deficit (indicate which) in equilibrium
• The change in equilibrium aggregate demand if the real interest rate rise to 8%

Expert's answer

a) Current level of investment

I=3500-10000r

I=3500-10000*0.04=3100

b) Equilibrium aggregate demand

S(personal)=I+NX-(T-G)

0.12Y=3100+1900-0.18Y-0.2Y+2500

Y=15000

c) Equilibrium personal saving

S(personal)=3100+1900-2700-3000+2500=1700

d) The government budget surplus in equilibrium

G-T=2500-0.2*15000=(-500)

G<T - budget surplus amounted to 500

e) The change in equilibrium aggregate demand if the real interest rate rise to 8%

I'=3500-10000*0.08=2700

0.2Y'=2700+1900-0.18Y'+2500-0.2Y'

Y'=14200

ΔY=14200-15000=-800 - equilibrium aggregate demand decreases by 800

I=3500-10000r

I=3500-10000*0.04=3100

b) Equilibrium aggregate demand

S(personal)=I+NX-(T-G)

0.12Y=3100+1900-0.18Y-0.2Y+2500

Y=15000

c) Equilibrium personal saving

S(personal)=3100+1900-2700-3000+2500=1700

d) The government budget surplus in equilibrium

G-T=2500-0.2*15000=(-500)

G<T - budget surplus amounted to 500

e) The change in equilibrium aggregate demand if the real interest rate rise to 8%

I'=3500-10000*0.08=2700

0.2Y'=2700+1900-0.18Y'+2500-0.2Y'

Y'=14200

ΔY=14200-15000=-800 - equilibrium aggregate demand decreases by 800

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