Economists in Funlandia, a closed economy, have collected the following informat

Question

Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y=10,000 C=6,000 T=1,500 G=1,700 Economists also estimate that the investment function is: I=3,300-100*r where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving, national saving, investment, and the equilibrium interest rate. Please note: national savings is not related to the interest rate, which means that the supply curve for loanable funds is vertical.

Explanation / Answer

Below Formulas are used to compute each of the following :

Y= Income C= Consumption T = Taxes G = Government Expenditure

Y=10,000 C=6,000 T=1,500 G=1,700

Private saving = Y-T-C =10000-1500-6000

=2500

Public Saving = T-G

=1500-1700 =-200

National Saving = Private Saving + Public Saving

=2500+(-200)

=2300

Equilibrium Interest Rate is the value of r that clears the market at loanable funds :

Saving=Investments

2300=3300-100r

100r=3300-2300

r=1000/100=10%

Thus Investment = 3300-100*10%

=3290

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