Impact of invention and change in savings on equilibrium level of income and the interest rate.
Consider the LM and IS functions determined in problems 2a and 3b and the equilibrium level of income and interest rate determined in 4a. Compared each one of the following situations with the equilibrium obtained in part 4a.
1.Determine the equilibrium level of income and the interest rate if after the invention of a new high-speed computer chip the investment function changes to I '= 1200 - 40 r . Show your work
2.If instead of saving 25% of their disposable income people decide to save 30%, what would happen to the equilibrium interest rate and level of income determined in part a. Show your work.
3.Consider your results from part a. What would happen to the equilibrium level of output and interest rates if the demand for real balances changes to: (M / P)^d = Y - 100r .
Illustrate what kind of shocks could have caused this change to the money demand function? Describe the new interest rate and equilibrium level of output.