1)
Real interest Supply of demand for
rate (percent per loanable funds loanable funds
Year) (2000 dollars) (2000 dollars)
5 2000 5,000
7 3000 4,000
9 4000 3,000
11 5000 2,000
The economy of Dream lsland, which is isolated from the rest of the world, has the supply of loanable funds schedule and the demand for loanable funds schedule shown in the table above. As it happens, all of the supply of loanable funds are from households'saving and the entre demand for loanable funds is from firms' investment demand.
a) Draw the demand and supply curves'
b) What is the equilibrium real interest rate?
c) What is equilibrium investment? Equilibrium saving?
d) Describe the situation in Dream lsland's loanable funds market when the real interest rate is 10 percent. ls there a shortage of loanable funds? A surplus of loanable funds?
e) Describe the situation in Dream island's capital market when the real interest rate is 6 percent. ls there a shortage of loanable funds? A surplus of loanable funds?
2)
Leisure Real GDP
(hours) (2000 dollars)
0 2000
40 1920
80 1680
120 1280
160 720
200 0
The people of Palm lsland are willing to work 80 hours a day for a real wage rate of $4 an hour. Then each dollar increase in tne real wage, they are willing to work 10 additional hours a day. Palm lsland's production possibilities are in the table above-
a) Draw Palm lsland's demand for labor curve
b) Draw Palm lsland's supply of labor curve
c) What are the full-employment equilibrium real wage rate and quantity of labor in Palm lsland's economy?
d) What is Palm lsland's potential GDP?
3)
Year Real GDP
(trillions of yen)
1991 478
1992 483
1993 484
1994 489
1995 499
1996 516
1997 525
1998 519
1999 524
2000 534
2001 536
The table above shows Japan's real GDP between 1991 to 2001.
a) Draw a figure with Japan's real GDP from 1991 to 2001.
b) ln the prwious 30 years, the growth rate of Japan's potential GDP was 6 percent a year. On your graph, show tne pJtfr that potential GDP would have followed if its GDP in 1991 was equal to potential GDP and the growth rate of potential GDP had been maintained in 1991-2001.
c) Show the Lucas wedge on your figure.
4) A typical household in Orangeland consumes only orange juice and shorts. Last year, which was the base year, the household spent $400 on juice and $120 on shorts. ln the base year, juice was $2 a bottle and shorts were $10 a pair. This year, juice is $3 a bottle, shorts are $12 a pair, and a typical household has bought 180 bottles of juice and 14 pairs of shorts.
a) What is the basket used in the CPI?
b) Calculate the CPI in the current year.
c) Calculate the inflation rate in the current year'
d) ls the inflation rate that you've calculated likely to be biased? Why or why not?