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Case Study: This question asks you to work with a simple short-run macroeconomic model developed in Ragan chapter 21.In this model there are only two types of decision-makers: firms and households (no government and no international considerationshow much). A description of the behaviour of the two groups is that firms choose how much to produce (Y) and howmuch newly produced capital goods they would like to purchase, and households choose how much of their income they would like to spend and how much they would like to save. Firms produce what they expect to sell. Firms want to purchase 125 (million $) of newly produced capital goods; i.e., I = 125. Households spend as follows: if Y (income) is zero they spend 50 (million $) and if income rises by $1 they spend $0.8; i.e., C = 50 + 0.8 × Y.
Question:
Now suppose that households change behaviour: they want to save 25 more (i.e., the savings function shifts up by 25). Find the new equilibrium levels of income (Y) and savings (S).
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