ans3154a

# ans3154a - Econ154b Spring 2005 Suggested Solutions to...

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Econ154b Spring 2005 Suggested Solutions to Problem Set 3 Question 1 (a) S d Y C d G Y 3600 2000 r 0.1 Y 1200 0.9 Y 4800 2000 r 600 2000 r (b) To graph the desired saving and desired investment curves, remember to solve the desired saving and desired investment equations for r , which yields: r 0.3 1 2000 S d and r 0.3 1 4000 I d . Graphically, To find the equilibrium interest rate we can use the goods market equilibrium condition that S d I d : S d I d 600 2000 r 1200 4000 r 6000 r 600 r 0.10 We now verify that at this interest rate, the demand for goods C d I d G is equal to the supply of goods Y : C d I d G 3600 2000 r 0.1 Y 1200 4000 r 1200 6000 6000 r 0.1 Y

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6000 6000 0.10 0.1 6000 6000, which is equal to Y 6000. (c) For G 1440, desired savings becomes S d Y C d G Y 3600 2000 r 0.1 Y 1440 0.9 Y 5040 2000 r 360 2000 r Solving this equation for r , we obtain: r 0.18 1 2000 S d . Clearly, this represent an upward (parallel) shift of the S d curve. The I d curve does not move. The interest rate will therefore rise. To find the new equilibrium interest rate, we solve again the goods market equilibrium condition that S d I d : S d I d 360 2000 r 1200 4000 r 6000 r 840 r 0.14. The new equilibrium interest rate is thus 0.14. We verify that at this interest rate the good market clears: C d I d G 3600 2000 r 0.1 Y 1200 4000 r 1440 6240 6000
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ans3154a - Econ154b Spring 2005 Suggested Solutions to...

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