Figuring out consumption, investment and tax from the aggregate expenditure equation.
Assume that GDP (Y) is 5,000; taxes (T) are 1,000, and government spending (G) is 1,500. Consumption (C) is given by the equation: C = 1,000 + 0.3(Y - T), Investment (I) is given by the equation: I = 1,500 - 50r where r is the real interest rate in percentage (i.e. if real interest rate is 5%, r=5.
a. What are the equilibrium values of C, I, and r?
b. Illustrate what are the values of private saving, public saving, and national saving?
c. Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 - 50r. What are the new equilibrium values of C, I, and r?