Reference no: EM132405794

1. Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and government budget surplus is $0.2 trillion. Assuming this economy is closed, find the answers to the following questions.

(a) Calculate consumption, government purchases, national saving, and investment.

(b) The economists also estimate that the investment function is:

I=2.9-0.1r

Where r is the country's real interest rate, expressed as a percentage. Use the investment level you obtain from part (a), calculate the equilibrium real interest rate.

2. Use the supply and demand diagrams for loanable funds market to answer the following questions:

(Hint: You need to draw the supply and demand diagrams in order to get full grade).

Policy I: If the lawmakers proposed a special account, for example, individual retirement accounts, which allowed people to shelter some of their saving from taxation so that households have incentives to save more. Use a supply-and-demand diagram to analyze this policy. What happens to the saving and investment? Does the interest rate rise or fall?

Policy II: If the lawmakers proposed an investment tax credit which gave a tax advantage to any firm building a new factory, then the firms were encouraged to invest more. Use a supply-and-demand diagram to analyze this policy. What happens to the saving and investment? Does the interest rate rise or fall?