5. An economy has full-employment output of 900, and government purchases are 200. Desired consumption and desired investment are as follows: Desired Real Interest Desired Rate (%) Consumption Investment 2345 2 610 150 600 140 590 130 5 580 120 6 570 110

a. Why do desired consumption and desired invest- ment fall as the real interest rate rises?

b. Find desired national saving for each value of the real interest rate.

c. If the goods market is in equilibrium, what are the values of the real interest rate, desired national saving, and desired investment? Show that both forms of the goods market equilibrium condition, Eqs. (4.7) and (4.8), are satisfied at the equilibrium. Assume that output is fixed at its full-employment level 4. Repeat part

(c) for the case in which government purchases fall to 160. Assume that the amount people desire to consume at each real interest rate is unchanged.