The closed economy is described by the 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. The income tax rate is 25%.
(A) Obtain the savings function equation S and find the equilibrium on the loanable funds market.
(B) Due to economic growth, 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. In the conditions of part B, how big increase in G can government afford if it does not want investment to fall below the level found in part A?