1. In each of these cases, how much saving is there in equilibrium? (Hint: Income not consumed must be saved.) Is saving equal to investment?
2. Imagine an economy in which consumer expenditure is represented by the following equation:
Imagine also that investors want to spend $500 at every level of income (I = $500), net exports are zero (X - IM = 0), government purchases are $300, and taxes are $200.
a. What is the equilibrium level of GDP?
b. If potential GDP is $3,000, is there a recessionary or inflationary gap? If so, how much?
c. What will happen to the equilibrium level of GDP if investors become optimistic about the country's future and raise their investment to $600?
d. After investment has increased to $600, is there a recessionary or inflationary gap? How much?