Question

Given the values in the table​ above, if the real interest rate rises from 5 to​ 6, the change in household saving is​ ________.

IS Curve Exogenous Variables and Parameters Table 1 mpc = 0.75 T = 2 = 2 i = 3 = 3 G = 1.45 = 1.45 T = 1.6 = 1.6 c= 0.05 d = 0.3 x= 0.15 NX = 1 = 1 Given the values in the table above, if the real interest rate rises from 5 to 6, the change in household saving is A. negative 0.45 O B. negative 0.5 O C. 1.55 OD. negative 1.55 O E. none of the above

I don't understand what I am doing wrong here.

Answer 1

Savings function can be derived as the income that is not spent on consumption. Below is the formula used for the calculation of savings:

When the interest rate is 5:

Calculate Y:

Calculate savings function:

When the interest rate is 6:

Calculate Y:

Calculate savings function:

The change in the household savings is:

Therefore, the correct option is (d).