Answer to important problem from book

# Answer to important problem from book - decreases. Putting...

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15 Chapter 3 National Income: Where It Comes From and Where It Goes ---------------- ---------------- . . . --- 6. a. Private saving is the amount ofdisposable income, Y T, that is not consumed: 8 private = Y T C 5,000 1,000 (250 + 0.75(5,000 1,000» 750. Public saving is the amount of taxes the government has left over after it makes its purchases: 8public = T G = 1,000 1,000 = O. Total saving is the sum of private saving and public saving: 8 = 8 private + 8public = 750 + 0 = 750. b. The equilibrium interest rate is the value of r that clears the market for loanable funds. We already know that national saving is 750, so we just need to set it equal to investment: 8 1 750 = 1,000 - 50r Solving this equation for r, we find: r = 5%. c. When the government increases its spending, private saving remains the same as before (notice that G does not appear in the 8private above) while government saving
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Unformatted text preview: decreases. Putting the new G into the equations above: 8 pnvate "" 750 8public T-G = 1,000 1,250 =-250. Thus, 8:::: 8private + 8public = 750 + (-250) 500. d. Once again the equilibrium interest rate clears the market for loanable funds: 8=1 500 = 1,000 -50r Solving this equation for r, we find: r = 10%. 7. To determine the effect on investment of an equal increase in both taxes and govern-ment spending, consider the national income accounts identity for national saving: National Saving [Private Saving] + [Public Saving] [Y -T -C(Y - TI] + [T - 0]. We know that Y is fixed by the factors of production. We also know that the change in consumption equals the marginal propensity to consume (MPC) times the change in disposable income. This tells us that ~ational Saving [-!1.T -(MPC x ( !1.T))] + [!1.T -!1.G] :::: !1.T + (MPC x !1.T)] + 0 = (MPC - 1) !1.T....
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## This note was uploaded on 10/15/2010 for the course ECON Econ 104B taught by Professor Cannotremeberban? during the Summer '10 term at UC Riverside.

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