Winter 2011 Midterm 2 Answers

C a group of political activists the coee celebrators

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Unformatted text preview: estment identity for You must have substituted partial credit. c. A group of political activists, the Coee Celebrators, is able to substantially reduce the size of government, thus decreasing G by 9 (so that G falls from 11 to 2). i.Did the demand for private loanable funds change? If so, what is the new D function? If not, why does it remain the same? (1 pt) No, the demand for loanable funds does not change. ID = 20 − r 1 point for correct answer or demand equation ii. Did the supply of private loanable funds change? If so, what is the new S function? If not, why does it remain the same? (1 pt) Yes, the supply of loanable funds will shift out. IS = 2r − 10 + 9 IS = 2r − 1 1 1 2 point for correct answer, 2 for correct supply equation iii. Draw a graph depicting the shift or shifts that occurred in the market for private loanable funds between parts (a) and (c). To get full credit you should clearly label the old and new equilibrium values, and indicate directions of the shifts and impacts on equilibrium values with arrows (2 pts) Is = Id 2r − 1 = 20 − r 3r = 21 r = 7% I = 2∗7−1 I= 13 demand equation 1 point for correct values and shifts, 1 point for correct graph including labels and arrows I did not take o points if you had a calculation error in c.ii, unless you shifted to the wrong direction If you did not shift supply/demand to the right, I took o 1 point regardless of c.ii. 2 S interest rate S’ 10% 7% D 10 13 Figure 1: 3 Investment Answer Key 2. a. Y = AEp = A + MPC(Y – T + TR) + I + G + NX (equilibrium condition, 0.5 pt) ∗ ∗ ++ = = . 10 + 11 + + − . . (big equation, 1 pt) 9 − 10 = 81 (eq’m value, 0.5 pt) b-i). G-saving = T – (TR+G) = 10 – (9+11) = -10 so deficit = 10 (0.5 pt) deficit/rGDP = 10/81 = 12.35% It doesn’t satisfy the 5% rule. (0.5 pt) b-ii). Y = 0.75(Y – 10) + 10 + 17 or ∗ = 10 + 17 + . . 0 − 10 . gives Y* = 78 (1 pt) G-saving = 10 – (0+17) = -7 so deficit = 7. Deficit/rGDP = 7/78 = 8.97% it doesn’t satisfy the 5% rule. (1 pt) b-iii) ). Y = 0.75(Y – 14) + 10 + 17 or ∗ = . 10 + 17 + G-saving = 14 – (0+17) = -3 so deficit = 3. Deficit/rGDP = 3/66 = 4.55% it satisfies the 5% rule. (0.5 pt) . . 0 − 14 gives Y* = 66 (0.5 pt)...
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