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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year:

Y = 10,000

C = 6,000

T = 1,500

G = 1,700

The economists also estimate that the investment function is:

I = 3,300 – 100r,

where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving, national saving, investment, and the equilibrium real interest rate.

To determine

The private saving, public saving, national saving, investment and equilibrium real interest rate.

Explanation

The savings is the revenue left after the spending. There are mainly three types of incomes and they are the private income, government income and national income. The personal income refers to the income of the individual or the consumer. When the personal income tax is paid out of the income of the individual, the remaining part is known as the private savings.

The government savings is the savings left with the government after the different spending of the government. The income of the government is the tax revenue collected by the government. The spending of the government includes different spending of the public programs. The remaining portion of the government income after the spending is known as the government savings. The national saving on the other hand is the summation of the private savings and the government savings.

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to  the equipments and the buildings and so forth.

Here, it is given that the GDP of the economy is $10,000, consumption is $6,000, taxes are $1,500 and government purchases of $1,700. The investment function is also given as I=3,300100r .

The private savings of the economy can be calculated by subtracting the taxes and consumption from the GDP of the economy as follows:

Private Savings (SP)=GDP(Y)Taxes(T)Consumption(C)=10,0001,5006,000=2,500

Thus, the private savings is $2,500

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