PS3-sol - ECON1312, Section 3 and 4 02/06/08 Problem Set 3...

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ECON1312, Section 3 and 4 02/06/08 Problem Set 3 Due TUESDAY 03/11/08, in class I will post the solutions to the problem set at 4:00pm on Tuesday so that you have access to it before the exam on Thursday. NOTE: You have the option to work in groups of up to three people and hand in one problem set per group. Question 1 If the United States cracked down on illegal immigrants and returned millions of workers to their countries of origin, what would happen in the United States to: 1) Potential GDP; 2) Employment; 3) the real wage rate; and 4) the real interest rate. Draw the labor market diagram, the production function, and market for loanable funds diagram and indicate the appropriate shifts. As millions of workers are returned to their country of origin, the supply of labor decreases. As a result real wages go up and employment falls. With lower employment, the level of potential RGDP on the production function will be lower. As RGDP (income) falls and there are fewer people in the economy, the total amount of savings falls. Consequently the supply of loanable funds shifts left and the real interest rate increases. Question 2 The market for loanable funds can be described by the following relationships: I = $30 bil – 3*r (where r is the real interes rate) Government budget balance = -$5 billion (the government is running a budget deficit) S = $15bil + 2*r The economy is borrowing from abroad $10 billion. a) Derive and graph the equations that describe the demand for loanable funds and the supply of loanable funds. DLF = 35 -3*r SLF = 25 + 2*r r=2%, Loans = 29 billion, Investment = 24 bil b) Find the equilibrium real interest rate, quantity of loans and investment. c)
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PS3-sol - ECON1312, Section 3 and 4 02/06/08 Problem Set 3...

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