1. Ch 25 Study Guide National Savings = Y-C-G = I6000 - 4000 – 1200 = 800 Y – T – C 6000 – 1000 – 4000 = 1000 T – G = - 200

2. d. Is the government’s budget policy contributing to growth in this country or harming it? Harming it because……. Supply of LF is shifting Left (reducing natl. savings) Raising ( r ) and therefore decreasing I You can not have growth without growth in Capital

3. Real Int RateQ of LF SupplyQ of LF Demand 61300700 51200800 41000 38001200 26001500

4. 4% $1,000

5. 2% : S = $600 ; D = $1500 = shortage = market forces Real Int Rate up

6. Decrease Savings by $400 at any given Int. Rate 5% $800

7. d. Start at equilibrium; government gives investment tax credit ; stimulates D for LF by $400 at any real int. rate ; new equilibrium? 5% $1200

8. Bonus: Compare parts c. and d. Which is most likely to increase growth?