To answer (a) (c), assume (i) consumption is an increasing function of disposable income and a decreasing function of the real interest rate, (ii) investment is a decreasing function of the interest rate So C C(Y T,r), 0 8C a(Y T) 1, ac (r) 0 and I I(r) (r) 0 Initially G and T are fixed at G and T Assume there is a decrease in taxes with no change in G Answer questions (a) and (b) (a) Show the effect on the national saving curve and the equilibrium interest rate (2) NS units of output (b) Given the tax decrease, what happens to equilibrium investment (0 5) (c) What happens to equilibrium consumption (0 5)

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To answer (a)-(c), assume (i) consumption is an increasing function of disposable income and a decreasing function of the real interest rate, (ii) investment

To answer (a)-(c), assume (i) consumption is an increasing function of disposable income and a decreasing function of the real interest rate, (ii) investment is a decreasing function of the interest rate. So C=C(Y-T,r), 0

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