1. To find the real interest rate, we need to use the Fisher equation, which states that the real interest rate is equal to the nominal interest rate minus the rate of inflation.
First, let's find the rate of inflation. The rate of inflation can be calculated using the Fisher equation as follows:
Rate of inflation = nominal interest rate - real GDP growth rate
In this case, the nominal interest rate is 11 percent and the real GDP growth rate is 5 percent. So,
Rate of inflation = 11% - 5% = 6%
Now, we can find the real interest rate by subtracting the rate of inflation from the nominal interest rate:
Real interest rate = nominal interest rate - rate of inflation
Real interest rate = 11% - 6% = 5%
Therefore, the real interest rate in Wiknam is 5%.
2. When the government raises taxes by $100 billion and the marginal propensity to consume is 0.6, the following changes occur:
a. Public saving: Public saving is the difference between government revenue (taxes in this case) and government expenditure. Since taxes have increased by $100 billion, public saving will increase by the same amount, i.e., by $100 billion.
b. Private saving: Private saving is the difference between disposable income (total income minus taxes) and consumption. When taxes increase by $100 billion, disposable income decreases, leading to a decrease in private saving. The change in private saving can be calculated as the change in disposable income multiplied by the marginal propensity to consume. In this case, the change in private saving will be -0.6 * $100 billion = -$60 billion.
c. National saving: National saving is the sum of public saving and private saving. Since public saving has increased by $100 billion and private saving has decreased by $60 billion, national saving will increase by the difference, i.e., by $40 billion.
d. Investment: Investment is financed by national saving, so any change in national saving results in a corresponding change in investment. Since national saving has increased by $40 billion, investment will also increase by $40 billion.
Therefore, the changes are as follows:
a. Public saving: Rises by $100 billion.
b. Private saving: Falls by $60 billion.
c. National saving: Rises by $40 billion.
d. Investment: Rises by $40 billion.