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Unformatted text preview: Suggested Solutions to EC2102 Macroeconomic Analysis I Tutorial 2, Week 5 (February 711, 2011) Question 1 (This is a continuation of Question 1 of Tutorial 1) ( v ) We know that at the equilibrium real interest rate of r & , s A & 1 ( r & ) + s B & 1 ( r & ) = 0 : Substituting Mr A and Mr B&s savings functions from part ( i ) of this question into the above, we obtain: 10 & 10 (1 + r & ) + 50 & & 2 (1 + r & ) + 1 ¡ (1 + r & ) + 50 & 50 (1 + r & ) + 10 & & 2 (1 + r & ) + 1 ¡ (1 + r & ) = 0 ; which you can show, after algebraic manipulation, that r & = 1 & & 1 : Di/erentiating r & with respect to & dr & d& = & 1 & 2 < . As & increases (both individuals are more patient), a lower interest rate is needed, in equilibrium, to compensate individuals&for their savings, and vice versa. This is because as & increases given some initial real interest rate r & that cleared the credit market, both Mr. A and B are more patient. At this original interest rate of r & , the saver would like to save more and the borrower would like to borrow less. Ifthe saver would like to save more and the borrower would like to borrow less....
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This note was uploaded on 01/18/2012 for the course ECONOMICS 2102 taught by Professor Tan during the Spring '11 term at National University of Singapore.
 Spring '11
 Tan

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