ECON 200 Problem Set 3 Solutions Fall 2007

ECON 200 Problem Set 3 Solutions Fall 2007 - Economics 200...

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Economics 200 Macroeconomic Theory Solutions to Problem Set 3 1. Under the assumption that this is an SOE, so . National saving is given by < œ < œ & M œ )!!  %!< œ '!! W œ ]  G  K ] œ &!!! K œ "!!! G œ #&!  Þ&Ð&!!!  "!!!Ñ œ ##&! . We have , and so W œ &!!!  ##&!  "!!! œ "(&! R\ œ W  M œ "(&!  '!! œ ""&!Þ . Thus For equilibrium in the foreign exchange market we thus need 50 5 ""&! œ "%!!  Ê œ Þ % % 2. An increase in investment opportunities will increase at each value of and so shifts the demand for M < loanable funds to the right as shown in the first diagram below. The new equilibrium in the market for loanable funds has a higher real interest rate as indicated by the rise from to . This implies that the quantity of < < ! " RGS < is lower as shown in the second diagram. Note that, in spite of the fact that the rise in tends to decrease M M M , while the shift in the curve tends to increase , we are certain that does indeed rise. To see this note MÐ<Ñ that is unambiguously larger in the new equilibrium and is unambiguously smaller so must
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