ECO403 Solution:-

Shared By:- Muhammad Azhar Mahmood 

Solution of Question 01:
a. Income of the consumers rises.
If income of consumers increases, demand curve D will shift to right as D’, price and quantity both will increase as P2 and Q2.

Question no 2: Consider an economy described by the following equations:
Y=C+I+G
Where, Y = 6,000, G = 2,000, T = 2,000
C = 300 + 0.50 (Y-T)
I = 2,000 – 60r


Private saving

Private saving = Y –T – C

= Y - T - C
= 6000 – 2000 – [300 + 0.50(6000 – 2000)]
= 4000 – 300 + 2000
= 5700

Public saving

Public saving = T – G
= 2000 – 2000
= 0

National saving

National Saving = Y – C – G

= 6000 – 300 + [0.50(4000)] – 2000
= 5700 + 2000 – 2000
= 5700

The equilibrium interest rate

6000 = (300 + 0.5 (6000 – 2000)) + (2000 – 60r) + 2000
6000 = 2300 + 2000 – 60r + 2000
60r= 2300 + 2000 + 2000 – 6000
60r= 300
= 300 / 60 = 5


The amount of equilibrium level of investment
= (Y – C – G)
= 6000 – 2300 – 2000
= 1700

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