KEY EQUATIONS

Desired national saving, S^d, is the level of national saving that occurs when consumption is at its desired level.

The expected real after-tax interest rate, r_a__t, is the after­tax nominal interest rate, (1 — t) i, minus the expected rate of inflation, π^e. The expected real after-tax interest rate is the real return expected by a saver when a portion, t, of interest income must be paid as taxes.

The user cost of capital, uc, is the sum of the interest cost, rp_κ, and the depreciation cost, dp_κ, where d is the depre­ciation rate and p_κ is the price of a capital good.

The desired capital stock, or the capital stock that maxi­mizes the firm's expected profits, is the capital stock for which the expected future marginal product of capital, MPK^f, equals the tax-adjusted user cost of capital, uc∕(1 — τ), where τ is the tax rate on the firm's revenues (equivalently, the effective tax rate).

Y = C^d + I^d + G (4.7)

The goods market equilibrium condition in a closed economy says that the goods market is in equilibrium when the aggregate quantity of goods supplied, Y, equals the aggre­gate quantity of goods demanded, C^d + I^d + G.

S^d = I^d (4.8)

Another way of stating the goods market equilibrium condition is that desired national saving, S^d, must equal desired investment, I^d. This equation is equivalent to Eq. (4.7).

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