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Equilibrium Interest Rates. Suppose that GDP is Y = $5, 000. You may assume zero government spending, borrowing, or taxes, and 0 exports or imports.

(a) Suppose that households save 30% of trend output. Compute aggregate consumption and aggregate savings.

(b) What is the level of investment I? Explain

(c) Suppose that investment demand is given by the schedule you computed in question 1(c). Illustrate this using a figure and compute the equilibrium interest rate.

(d) Now suppose that (as in1(e)above) firms become more optimistic about the future and raise the estimates of factory yield by $3. Illustrae this in a figure, and compute what happens to equilibrium investment and interest rates.

(e) Suppose that expectations return to normal, but that households decide to start saving less. They decrease their savings from 30% to 25% of trend income. What happens to investment and interest rates?

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