Consider the following:
An economy is found to have output, y = 20000 Also assume that the government runs a deficit where tax revenue T= 4000 and government expenditures G=5000. The consumption function is represented by the following equation:
C=2000+0.5(Y-T)
Investment depends on the interest rate and is represented by the following equation:
Ir = 5300-50r
Answer the following questions:
a) What is the marginal propensity to consume in this economy?
b) What is private saving in this economy?
c) What is public saving in this economy?
d) What is national saving in this economy?
e) What is the equilibrium interest rate in this economy?
If the government decides to balance the budget by lowering spending
f) What will the new real interest rate be?
g) If the nominal interest rate is 1%, what would the inflation rate be in this economy?