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4. Output in an economy is 6,500. Government purchases, G, are 1,200. Taxes, T, are 800. Consumption is given by: C = 3,700 2,000r +

4. Output in an economy is 6,500. Government purchases, G, are 1,200. Taxes, T, are 800. Consumption is given by: C = 3,700 2,000r + 0.2(Y-T) Investment is given by: I = 1,000 -4,000r (a) Find the equilibrium interest rate. (b) How much are national savings? (c) Suppose now that T rises to 900 (any other exogenous variables are unchanged). Find the equilibrium interest rate and national savings. (d) Graph the effects of the increase in T in the market for loanable funds. (e) Provide intuition for the effects that an increase in taxes has on the real interest rate and the supply of loanable funds.

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