Question

In an economy, the desired consumption and investment functions are given by.

Cᵈ=4000+0.25Y−4500r
fᵈ=2400−5000r
​where Y is output and r is the real interest rate. Govemment purchases, G=2000. Determine the equation for the national saving function to show how desired national saving, Sᵈ, depends on r and Y.

Answer 1

The equation for the national saving function, Sᵈ, depends on the real interest rate (r) and output (Y) in the economy, and it can be derived by subtracting government purchases from the desired consumption.

Step-by-step explanation:

The desired national saving, Sᵈ, depends on the real interest rate (r) and output (Y) in the economy. National saving (Sᵈ) is the difference between desired consumption (Cᵈ) and government purchases (G). To determine the equation for the national saving function, we can subtract the government purchases (G) from the desired consumption (Cᵈ).

So, the equation for the national saving function is:

Sᵈ = Cᵈ - G

Substituting the values from the desired consumption function (Cᵈ) and government purchases (G), we can rewrite the equation as:

Sᵈ = (4000 + 0.25Y - 4500r) - 2000

Sᵈ = 2000 + 0.25Y - 4500r