Consider a closed economy. An economy has full-employment output of 600. Government purchases, G = 100. Desired consumption and desired investment are
Cd = 300-160r+0.2Y, and Id = 100-240r, 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 the goods market equilibrium, find the real interest rate that clears the goods market. Assume that output equals full employment output
c. Government purchases rise to 120. How does this increase change the equation describing desired national saving? Show the change graphically. What happens to the market-clearing real interest rate?