What is the level of private investment in equilibrium? Write an equation for the investment demand curve?
Consider the closed economy of country A where KI = 0. In year 2009, government expenditure (G) is $300 billion, the total tax collected (T) is $900 billion and tax being transferred (TR) is $200 billion. The loanable fund market is currently in equilibrium, and the total demand equation (including SG) is DLF: r =0.04 - 0.000025Q, where r is the real interest rate, and that private saving, SP, equals $800 billion at equilibrium
Answer: Quantity of LF demanded in equilibrium = Investment in equilibrium + (-SG), where (-SG) is the government deficit. Since we have a budget surplus of SG = 400, therefore, I = 800-(- SG) =800+400=$1200 billion. Thus, the level of I is $1200 billion in equilibrium.
Or we can simply use that NS=I =1200 in equilibrium, in closed economy.
To find the investment curve we first need to think about how a government budget surplus affects the demand for loanable funds curve (we need to do this since the loanable funds demand curve we were given includes I – SG and not just I). In class we saw that a budget deficit shifted the demand for loanable funds curve to the right; that implies that a budget surplus, if modeled on the demand for loanable funds curve side of the model, will cause the demand for loanable funds curve to shift to the left. This leftward shift has already been taken into account with the equation you were provided for the demand for loanable funds curve, so now if we want to find the investment demand curve we will need to shift this curve back to the right (that is, take out the budget surplus from the curve).Since we have a budget surplus, then for every real interest rate, shift the total demand curve to the right by 400,then we have r=0.04-0.000025(Q-400); that is, I-curve is that: r=0.05-0.000025Q.
You might also like to view...
A firm is said to have excess capacity when it produces the amount of output
A) such that price is greater than marginal cost. B) such that marginal revenue is greater than marginal cost. C) smaller than that which minimizes average total cost. D) larger than that which minimizes average total cost.
Average fixed cost
A) does not change as total output increases or decreases. B) varies directly with total output. C) falls continuously as total output expands. D) rises as the output is expanded.
By definition, equity finance
a. is accomplished when units of government sell bonds. b. is accomplished when firms sell bonds. c. is accomplished when firms sell shares of stock. d. involves "fair" interest rates or dividend yields.
The main way corporations and governments raise money is through
A. the stock market. B. the bond market. C. the equity credit channel. D. loans from banks.