Explain the paradox of saving now suppose the economy is

Question

(a) Explain the paradox of saving. Now suppose the economy is characterised by the following behavioural equations:

C = c0 + c1YD

YD = Y - T

I = b0 + b1Y

Government spending and taxes are constant, and investment increases with output.

(b) Suppose that consumers decide to consume less (and therefore to save more) for any given amount of disposable income. Specifically, assume that consumer confidence (c0) falls. What will happen to output?

(c) As a result of the effect on output you determined in part (b), what will happen to investment? What will happen to public saving? What will happen to private saving? Explain. (Hint: Consider the saving-equals-investment characterisation of equilibrium). What is the effect on consumption?

(d) Comment on the following logic: ‘When output is too low, what is needed is an increase in demand for goods and services. Investment is one component of demand, and saving equals investment. Therefore, if the government could just convince households to attempt to save more, then investment, demand for goods and services, and output, would increase.

The problem related to Economics and it explains about explaining the paradox of saving with given equations.

Answer 1

This is the assignment which you have to complete in given time as well use all guidelines that shown below: (a) Illustrate the paradox of saving. Now assume the economy is characterized via the subsequent behavioral equations: C = c0 + c1YD YD = Y - T I = b0 + b1Y Government spending and taxes are constant, and investment increases with output. (b) Suppose that consumers decide to consume less (and therefore to save more) for any specified amount of disposable income. Purposely, assume that consumer confidence (c0) falls. What will happen to output? (c) As a consequence of the effect on output you determined in part (b), what will occur to investment? What will occur to public saving? What will occur to private saving? Explicate.