Problem 1. Fill in the blanks for this question. Use as possible answers "An increase", "A decrease", or "no change".
a. Holding everything else constant, the government increases its spending by $500 and its tax collections by $200. In the loanable funds market there will be
__________ in the interest rate
__________ in the level of private savings
__________ in the level of consumption
__________ in investment
b. Holding everything else constant, households decide to save more at every interest rate. In the loanable funds market there will be
__________ in the interest rate
__________ in the level of private savings
__________ in the level of consumption
__________ in investment
c. Holding everything else constant, country Y's exports increase by $300 while its imports increase by $400. In the loanable funds market there will be
___________in the interest rate
___________ in the level of private savings
___________in the level of consumption
___________in investment
Problem 2. Answer true or false in each of the following blanks. Suppose an economy's level of capital and technology are fixed. If the economy increases its hiring of labor
a. Labor productivity will increase _______
b. Real GDP will increase ________
c. Capital productivity will decrease ________
d. Marginal productivity of capital definitely decreases _________
e. Marginal productivity of labor decreases ______
f. The aggregate production function will shift up if the aggregate production function is graphed with real GDP on the vertical axis and capital on the horizontal axis _________
Problem 3. Suppose you are told that the demand for loanable funds for investment is given by the equation
I = 1000 - 100r
and the supply of loanable funds from private savings is given by the equation
Sp = 100r
where I is investment spending, r is the interest rate expressed as a whole number, and Sp is the quantity of private saving. Assume initially that the government has a balanced budget and the trade balance is equal to zero.
a. What is the equilibrium interest rate and quantity of loanable funds given the above information?
b. Now, suppose you are told that government spending is increased by $100 while taxes are increased by $50. Find the new equilibrium interest rate and the new equilibrium quantity of private saving given this information. Show and explain your work to get full credit for you answer. (Hint: the next question asks you to graph your work.
c. Illustrate part (a) and part (b) with a well labeled graph. Be sure to label the two axes, the initial equilibrium and the new equilibrium.