Question

Economists in Fundlandia, a closed economy, have collected the following information about GDP and public savings in their country: Y = 1000 G = 100 T= 100 They further estimate that national savings and investment are governed by the following expressions: S = 150 + 50*r 1 = 600 - 100*r Where r is the country's real interest rate in % terms (thus if you find r = 5, then r is 5%). b.) The government of Funlandia plans to increase government spending by 150 next year and finance this increase in G by issuing new government bonds. Which of the two functions below now describes national savings in Moldavia? S = 300 + 50*r S = 50*r 1.) The function that now describes national savings in Moldavia is ------- because this increase in G has -------- public savings. A. S = 300 + 50*r; increased B. S = 50*r;increased C. S = 50*r; decreased D. S = 300 + 50*r; decreased Now calculate the new levels of investment and the real interest rate as a result of this policy change. Depict your answers both before and after the change in a well-labeled loanable funds diagram. [Use "A" for your original equilibrium point and "B" for your new equilibrium point after the policy change.] ii.) The new equilibrium real interest rate in Fundlandia is _____%. A. 4.5 C.5 D. 4 iii.) The new equilibrium level of investment in Fundlandia is: A. 500 B. 200 C. 400 D. 300

Answer 1

B)S=50*r

Initial national saving=150+50*r

National saving=private saving +T-G=150+50*r

So, Increasing G by150, national saving

Private Savings+T-G-150=150+50*r-150=50*r

Option B is correct

i) option C is right. Increase in G decrease the national saving .

ii) equilibrium interst rate, at where, S( supply of loanable funds)=Investment ( demand of loanable funds)

50r=600-100r

150r=600

r=600/150=4%

Option D is correct

iii) I=600-100*4=600-400=200

Option B is right

Initial equilibrium,

150+50r=600-100r

150r=450

r=450/150=3

I=600-100*3=600-300=300

Newsaning 2 Tuvestmad initial saving resputerst ese porn funds (Emrest) Loanable funds Market