An economy has full-employment output of 600. Government purchases, G, are 120. Desired consumption and desired investment are
Cd = 360 - 200r + 0.10F, and
Id = 120 - 400r,
where Y is output and r is the real interest rate.
a. Find an equation relating desired national saving Sd to r and Y.
b. Using both versions of the goods market equilibrium condition, Eqs. (4.7) and (4.8), find the real interest rate that clears the goods market. Assume that output equals full employment output.
c. Government purchases rise to 144. How does this increase change the equation describing desired national saving? Show the change graphically. What happens to the market-clearing real interest rate?