Consider an economy described by the following equations:Y = C+I+GY = 5000G = 1000T = 1000C = 250 + 0.75(Y-T)I = 1000 - 50rIn this economy, compute private saving, public saving, and national saving.Find equilibrium interest rate.Now suppose that G rises to 1250. Compute private saving, public saving, and national saving.Find the new equilibrium interest rate.Using your knowledge of Macroeconomics and intuition explain the reason why increasing government expenditure causes interest rate to rise?If the government wants to increase the amount of savings in the economy, how should it alter government spending? What effect will this action have on the interest rate in the economy?

1. Private saving= Y-T-C Y=5000 T=1000 C=250-0.75(5000-1000) Private Saving=…

Answered: Consider an economy described by the…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 5PA

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Consider an economy described by the following equations:

Y = C+I+G

Y = 5000

G = 1000

T = 1000

C = 250 + 0.75(Y-T)

I = 1000 - 50r

In this economy, compute private saving, public saving, and national saving.
Find equilibrium interest rate.
Now suppose that G rises to 1250. Compute private saving, public saving, and national saving.
Find the new equilibrium interest rate.
Using your knowledge of Macroeconomics and intuition explain the reason why increasing government expenditure causes interest rate to rise?
If the government wants to increase the amount of savings in the economy, how should it alter government spending? What effect will this action have on the interest rate in the economy?

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