Desired consumption for an economy is given by the equation Cd = 1000 + .6Y - 4000r. Government purchases are given by G = 1500.
(a) Write an expression relating desired saving, Sd, to Y and r.
(b) Suppose that the full-employment level of output is 10,000. Graph the relationship between desired saving, Sd, and the real interest rate r. (Your graph should include properly labeled axes and an indication of the scale on each axis.)
(c) If desired investment for the economy is given by the equation Id = 2000 - 6000r, calculate the equilibrium real interest rate for the economy.
(d) Using the equilibrium real interest rate that you calculated in part (c), calculate the equilibrium level of saving, investment, and consumption in the economy. Does Y = C + I + G in equilibrium?
(e) Add the relationship between desired investment and the real interest rate to your graph in part (b), and show the equilibrium values of r, Sd and Id from parts (c) and (d)