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Unformatted text preview: for private savings to fall by 100. Since national savings is the sum of private and public savings, national savings falls by 100. b. Given your answer to part a, will the equilibrium real interest rate change? If so, by how much? If not, explain why not. Since national savings falls, we know that the equilibrium interest rate will rise. But by how much? We know that S = I d in equilibrium, so if S falls by -100, then to maintain equilibrium, then I must fall by 100. From the investment demand function, we know that when r changes by 1, I falls by 100. Thus, r rises by 1. c. Draw a figure that illustrates what you found above. r +1 r S ‘ S I d r I, S D 100 d. Without making the calculations, how would your answer in part b change if consumption were a function of the real interest rate? If consumption were a function of the interest rate, then the change in the interest rate would be smaller since the rise in the interest rate would induce more savings....
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This note was uploaded on 04/13/2008 for the course ECON 53 taught by Professor Barbezat during the Spring '08 term at UMass (Amherst).
- Spring '08