3. Investment and Savings and Goods Market Equilibrium

Part 1: Use the saving-investment diagram (graph) to analyze the effects of the following events on the national savings, investment, and interest rates and clearly label any shifts or changes:

A) The government announces that, due to the high level of the national debt, it expects to increase the tax rate over households and businesses in the near future.

B) A news that a vaccine for COVID-19 will be released next week comes out and the population expect problems with the pandemic to end within a month. This causes an increase in expected future income of the population.

Part 2:

A) Define net investment. What are the implications for a firm's level of capital in the next period, t+1, given that net investment is negative in this current period, t? Is negative net investment usually desired in an economy?

B) Given the economy level of capital, K, is below the desired optimal level of capital, K*, what policy recommendations would you give the central bank or federal government to help stimulate economic growth?