The economy is described by the following investment and consumption functions: I = 2,000-100r, C = 200+0.8(Y-T).
Real GDP is equal to 6,000, government spending 1,000. Government taxes income at rate 25%.
(A) Obtain the savings function equation and find the original equilibrium on the loanable funds market.
(B) Due to technological progress, GDP increases by 5%. Find the new equilibrium.
(C) Show the initial and new equilibria on the diagram for the loanable funds market.
(D) Government wants to increase its spending. How big increase in G can government afford if it does not want investment to fall below the level found in part A?