Consider the tolowing model of a very simple economy. Household seing and invesi

Question

Consider the tolowing model of a very simple economy. Household seing and invesiment beha or depend in paton wealth (accumulated savinas and inhertance.In the late 1990s many were concemed with very lame increases in stock values (a tom ot wealth) and its possible ettect on vrngad nvestment have lthe fallawsing infiomatior + C 5U + 0.BUY + ?.10W 1200 we are gmaig the tect mat seng sdas to the stock ot wesin. Callate the vaucs of Y C, and rspss as ingS) Y1850 C-81050 5200 SuFFnse tha wealth ncreases by 50 percern Calculate the values af eq?linnum Y C, and S New Y W-1,200 rquiibriurn saving () (Enter your Enter your ,esponses asinet ers New S S

Explanation / Answer

In equilibrium, Y = C + I, and S = Y - C (= I)

(1) Initially,

Y = 50 + 0.8Y + (0.1 x 1200) + 200

Y = 250 + 0.8Y + 120

(1 - 0.8)Y = 370

0.2Y = 370

Y = 1850

C = 50 + (0.8 x 1850) + (0.1 x 1200) = 50 + 1480 + 120 = 1650

S = 1850 - 1650 = 200

(2) When W increases by 50%, new value of W = 1200 x 1.5 = 1800

Y = 50 + 0.8Y + (0.1 x 1800) + 200

Y = 250 + 0.8Y + 180

(1 - 0.8)Y = 430

0.2Y = 430

Y = 2150

C = 50 + (0.8 x 2150) + (0.1 x 1800) = 50 + 1720 + 180 = 1950

S = 2150 - 1950 = 200

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