Question

Please consider the following scenario. After reading a recent best-seller documenting a growing population of low-income elderly people who are ill-prepared for retirement, most residents of this country decide to increase their saving at any given interest rate. Assume that investment expenditures remain constant over the next 12 months, but can increase over the long run. Other things being equal, please explain whether and/or how this could affect the following:

a) The equilibrium interest rate over the next six months or so.

b) The equilibrium real GDP over the next few quarters.

c) The unemployment rate over the next year.

d) The equilibrium real GDP over the next 5-10 years or so.

Answer 1

a)The equilibrium interest rate over the next six months or so will decrease.As the saving rises, interest rate will fall.
b) The equilibrium real GDP over the next few quarters will remain same as this decrease in interest rate will not increase the real GDP in few quarters.
c) The unemployment rate over the next year will rise as interest rate falls.[ they are negatively related]
d) The equilibrium real GDP over the next 5-10 years or so will rise as interest fall and investment rises.