market simultaneously If LF market in equilibrium then Y C G IAdd C G to both

Market simultaneously if lf market in equilibrium

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market simultaneously: If L.F. market in equilibrium, then Y C G = I Add ( C + G ) to both sides to get Y = C + I + G (goods market eq’m) Thus, r adjusts to equilibrate the goods market and the loanable funds market simultaneously: If L.F. market in equilibrium, then Y C G = I Add ( C + G ) to both sides to get Y = C + I + G (goods market eq’m) Thus, Eq’m in L.F. market Eq’m in goods market
Algebra example Suppose an economy characterized by:Factors market supply: labor supply= 1000Capital stock supply=1000Goods market supply: Production function: Y = 3K + 2LGoods market demand: Consumption function: C = 250 + 0.75(Y-T)Investment function: I = 1000 – 5000rG=1000, T = 1000
Algebra example cont. Given the exogenous variables(Y, G, T), find the equilibrium values of the endogenous variables(r, C, I)
Algebra example cont. Suppose government spending rises by 250 to 1250 Use intuition first to make a conjecture. Verify by algebra: Y = C + I + G 5000 = 250 + 0.75(5000-1000) +1000– 5000r + 1250 - 500 = -5000r, so r = 0.10 And I = 1000 – 5000*(0.10) = 500 . Investment falls by 250 . C = 250 + 0.75(5000 - 1000) = 3250 as before for this consumption function.
Case study: Reagan deficits Reagan policies during early 1980s: ¨ increases in defense spending: G > 0 ¨ big tax cuts: T < 0 According to our model, both policies reduce national saving: ( ) S Y C Y T G G S   T C S    
The Reagan deficits cont. r 2 1 S 2 S
Data 19.9 19.4 variable 1970s 1980s T G –2.2 –3.9 S 19.6 17.4 r 1.1 6.3 I 19.9 19.4 T G , S , and I are expressed as a percent of GDP All figures are averages over the decade shown.

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