Illustrate what happens to the market-clearing real interest

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Reference no: EM1357171

An economy has full-employment output of 6000. Government purchases, G, are 1200. Desired consumption and desired investment are C^d = 3600 - 2000r + 0.10Y, and
I^d = 1200 - 4000r, where Y is output and r is the real interest rate.

a. Find an equation relating desired national saving, S^d, to r and Y.

b. Using both version of the goods market equilibrium condition, equations Y = C^d + I^d +G, and S^d = I^d, find the real interest rate that clears the goods market. Assume that output equals full-employment output.

c. Government purchases rise to 1440. How does this increase change the equation describing desired national saving? Show the change graphically. What happens to the market-clearing real interest rate?

Reference no: EM1357171

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