Economics 102 Fall 2007 Homework 4 Answer Key
1.
You are given the following information about aggregate expenditures and output as
well as the table below describing investment and savings behavior for a small open
economy with a balanced budget.
GDP = 50,000
C = 25,000
X = 8,000
M = 12,000
a.
Assume a linear relationship, and find the demand equation for the loanable funds
market.
We have two points of (I,i), so we can find the slope equal to
m = (i
2
– i
1
) / (I
2
– I
1
) = (8 – 3) / (7,900 – 21,900) =
- 5/14,000 = - 1/2,800
Then we can plug into the slope intercept form, i = mI + b
8 = - 1/2,800 * 7,900 + b
8 = - 79/28 + b
b = 303/28
i = - 1/2800 * I + 303/28
or if we rearrange we get the linear relationship of
I = 30,300 – 2,800 * i
double check to make sure both points work
8 = - 1/2800 * 7,900 + 303/28= -79/28 + 303/28
Checks
3 = - 1/2800 * 21,900 + 303/28= -219/28 + 303/28
Checks
b.
Assume a linear relationship, and find the supply equation for the loanable funds
market. (Note: Check capital inflows (KI))
We have two points of (S
p
,i), so we can find the slope equal to
m = (i
2
– i
1
) / (S
p2
– S
p1
) = (8 – 3) / (30,000 – 15,000) = 5/15,000 = 1/3000
Then we can plug into the slope intercept form, i = mI + b
8 =
1/3000 * 30,000 + b
8 = 10 + b
b = - 2
i =
1/3000 * S
p
- 2
i
I
S
p
8
7,900
30,000
3
21,900
15,000