An economy has full-employment output of 900, and government purchases are 200. Desired consumption and desired investment are as follows:

a. Why do desired consumption and desired investment fall as the real interest rate rises?
b. Find desired national saving for each value of the real interest rate.
c. If the goods market is in equilibrium, what are the values of the real interest rate, desired national saving, and desired investment? Show that both forms of the goods market equilibrium condition, Eqs. (4.7) and (4.8), are satisfied at the equilibrium. Assume that output is fixed at its full-employment level.
d. Repeat part (c) for the case in which government purchases fall to 160. Assume that the amount people desire to consume at each real interest rate is unchanged.

Transcribed Image Text:

Desired Desired Consumption 610 600 590 580 570 Real Interest Rate (%) Investment 150 140 130 120 110