Econ 1102 Homework

1. The exogenous increase in household saving is illustrated in the first supply and demand for savings diagram as the increase in the supply of saving with the real interest rate, r, remaining constant. Thus the savings has increased, revealing excess saving from  to . The change in the level of saving in this model is proportionate and equal to the exogenous increase which is calculated as  - . Exogenous factors determining the level of savings include changing income, change in wealth and tastes & preferences.[pic 1][pic 2][pic 3][pic 4]

1. As mentioned before the increase in the level of savings due to the exogenous increase in household saving is calculated by  - . The actual equilibrium increase in savings can be similarly measured through comparing the shift of the equilibrium point from  to , resulting in  - . Therefore the difference between both saving increases is measured as  - .[pic 5][pic 6][pic 7][pic 8][pic 9][pic 10][pic 11][pic 12]

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1. The exogenous increase in saving for the saving and investment version of the two-sector model is illustrated in the second diagram below. The supply curve would shift from  to  with an increase in consumption as reflected with the increase from A to B where the planned aggregate expenditure is kept constant. The level of savings in the model is determined by desired investment and varying consumption of the household.[pic 14][pic 15]

1. The initial exogenous increase is measured as the increase in initial consumption from - to -. On the other hand, equilibrium savings does not change in this model as the investment line stays constant. The exogenous increase with the planned aggregate expenditure constant allows savings to increase from A to B which again is excess saving.[pic 16][pic 17]

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1. The two models differ with their varying assumptions that affect the movements of the curves as well as he factors affecting each.  This is clearly evident through the differing shape of each. The classical model and Keynesian model differ in their objectives, Keynesian model aims to model short term events (immediate) while the classical model models long-term events. This allows them to have varying factors affecting shifts such as inflation, government regulation and taxes for the classical model while Keynesian focuses on economic policies producing immediate results. However both models are used to illustrate aggregate demand and supply.