Assignment 3 Econ
Assignment 3: Economics 202
Problems for Chapter 13
1. Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year:
Economists also estimate that the investment function is:
where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving, national saving, investment, and the equilibrium interest rate. Please note: national savings is not related to the interest rate, which means that the supply curve for loanable funds is vertical. (15 points)
Private Savings= Y-T-C 10000-1500-6000= 2500
Public Saving= T-G 1500-1700= -200
National Saving= S=(Y-T-C)+(T-G)=(10000-1500-6000)+(1500-1700)= 2300
Investing= I=Y-C-G 10000-6000-1700= 2300
Real interest rate
I = 3,300-100r , 100r = 3,300-I
100r = 3,300-2300 ( I=2300)
100r = 1000
100r/100 = 1000/100 (dividing it by 100) r = 10
2. In the summer of 2010, Congress passed a far-reaching financial reform to prevent another financial crisis like the one experienced in 2008-2009. Consider the following possibilities:
a. Suppose that, by requiring firms to comply with strict regulations, the bill increases the costs of investment. On a well-labeled graph, show the consequences of the bill on the market for loanable funds. Be sure to specify changes in the equilibrium interest rate and the level of saving and investment. What are the effects of the bill on long-run economic growth (recall: higher investment would increase capital and capital per worker)? (7 points)
i. The demand loanable would decline along with the equilibrium. The saving and investments will decline as well hence giving the economy a lower rate for the future. ii. b. Suppose, on the other hand, that by effectively regulating the financial system, the bill increases savers’ confidence in the financial system. Show the consequences of the policy in this situation on a new graph, again noting changes in the equilibrium interest rate and
Problems for Chapter 13
1. Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year:
Economists also estimate that the investment function is:
where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving, national saving, investment, and the equilibrium interest rate. Please note: national savings is not related to the interest rate, which means that the supply curve for loanable funds is vertical. (15 points)
Private Savings= Y-T-C 10000-1500-6000= 2500
Public Saving= T-G 1500-1700= -200
National Saving= S=(Y-T-C)+(T-G)=(10000-1500-6000)+(1500-1700)= 2300
Investing= I=Y-C-G 10000-6000-1700= 2300
Real interest rate
I = 3,300-100r , 100r = 3,300-I
100r = 3,300-2300 ( I=2300)
100r = 1000
100r/100 = 1000/100 (dividing it by 100) r = 10
2. In the summer of 2010, Congress passed a far-reaching financial reform to prevent another financial crisis like the one experienced in 2008-2009. Consider the following possibilities:
a. Suppose that, by requiring firms to comply with strict regulations, the bill increases the costs of investment. On a well-labeled graph, show the consequences of the bill on the market for loanable funds. Be sure to specify changes in the equilibrium interest rate and the level of saving and investment. What are the effects of the bill on long-run economic growth (recall: higher investment would increase capital and capital per worker)? (7 points)
i. The demand loanable would decline along with the equilibrium. The saving and investments will decline as well hence giving the economy a lower rate for the future. ii. b. Suppose, on the other hand, that by effectively regulating the financial system, the bill increases savers’ confidence in the financial system. Show the consequences of the policy in this situation on a new graph, again noting changes in the equilibrium interest rate and