Principles of economics (macro)

Saving, Investment, and financial system

Exercises # 4

Question 1: Explain the difference between saving and investment as defined by a

macroeconomist. Which of the following situations represent investment and which represent
saving? Explain.
a) Your family takes out a mortgage and buys a new house.
b) You use your $200 paycheck to buy stock in AT&T.
c) Your roommate earns $100 and deposits it in his account at a bank.
d) You borrow $1,000 from a bank to buy a car to use in your pizza delivery business.

Question 2: Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion,
an public saving is $0.2 trillion. Assuming this economy is closed, calculate consumption,
government purchases, national saving, and investment.

Question 3: saving and investment in the macroeconomic equation: Investment and Savings
equations are the following:

I = 100 − 500i
S = 0,25Y − 40

1) What is the level of investment when the interest rate is respectively 4%, 5%, 6%?
2) Calculate the equilibrium income at the level of investment you have just determined.
3) Plot these points in space (Y, i) and give an intuitive interpretation of the resulting curve

Question 4: Economists in X-land, 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
The economists also estimate that the investment function is:
𝐼 = 3,300 − 100𝑟,
where r is the country’s real interest rate, expressed as a percentage.

Calculate private saving, public saving, national saving, investment, and the equilibrium real
interest rate.