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# discussionsectionhandout8answersfall2007 - Econ 102 Fall...

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Econ 102: Fall 2007 Discussion Section Handout #8 Answer Key 1. Use the following data about the economy of Celticland to answer the following questions. Interest Rate i Investment (I) Savings (Sp) 8 2400 1200 15 1000 4000 a. Find i. The equations for I and Sp. Slope I = (8-15)/(2400-1000) = (-1/200) i = b – (1/200) I 8 = b – (1/200)*2400 b = 20 i = 20 – (1/200) I I = 4000 – 200i Slope Sp = (15-8)/(4000-1200) = (1/400) i = b + (1/400) Sp 8 = b + (1/400)*1200 b = 5 i = 5 + (1/400) Sp Sp = 400i - 2000 ii. Equilibrium interest rate, and Investment 400i – 2000 = 4000 – 200i i = 10 Sp = 400(10) – 2000 Sp = 2000 I = 4000 – 200(10) I = 2000 b. Now suppose there are capital inflows in the economy. Imports are 8000, while Exports are only 7400. Find: i. The new loanable funds supply equation Since i = 5 + (1/400)*Sp, Sp = 400i – 2000 before the inflows Adding the inflows, New Sp = 400i - 1400 ii. The new Equilibrium interest rate, Investment level , and Private Savings level. New Supply = Sp+ KI = 400i – 1400 I = 4000 – 200i 400i -1400 = 4000 – 200i i = 9 I = 4000 – 200(9) I = 2200 Supply = Total Savings = Sp + KI Sp = 2200 – KI = 2200 – 600 = 1600 iii. How much does private savings changes because of this? Why does private savings change, and does this make sense?

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