Y = E(K, L) = AK^L A = 1, K = 3000, L = 9000 a = 0.6 1= (r) = 1200 - 10r C= C (Y-T) = 0.75 (Y-T) T= 800 G = 600 a) Find the equilibrium real interest rate in the goods and services market. b) What is the equilibrium real interest rate in the loanable funds market? (Hint: Think about how the goods and services market equilibrium condition relates to the loanable funds market equilibrium condition)

Y = E(K, L) = AK^L A = 1, K = 3000, L = 9000 a = 0.6 1= (r) = 1200 - 10r C= C (Y-T) = 0.75 (Y-T) T= 800 G = 600 a) Find the equilibrium real interest rate in the goods and services market. b) What is the equilibrium real interest rate in the loanable funds market? (Hint: Think about how the goods and services market equilibrium condition relates to the loanable funds market equilibrium condition)

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter9: An Introduction To Basic Macroeconomic Markets

Section: Chapter Questions

Problem 9CQ

See similar textbooks

Similar questions

The Bureau of economic analysis announced today that gross domestic product, the widest measure economic activity, grew in a meager 0.9% annualized rate in the third quarter compared to the first six months of 2018 the US economy in the first 3 quarters of 2019 grew just 1.6%, a pronounced slow down relative to the 3.9% growth in the second half of 2018. Some of this slowdown can be explained by a negative contribution from inventory investment, which contracted 0.9% in the third quarter. There’s plenty to worry about in this report, as it showed us Retail sales Fell for the first time in seven months in September, although overall consumer spending which comprises about 66% of the US GDP activity was up 0 .4%. Capacity utilization also decreased 0.4% in the third quarter to 74.5%.1. Write a phrase from the article that speaks to change in household consumption in the third quarter in 2019. 2. From the information in this article, did household consumption increase or decrease in the…
In an economy, the future marginal product of capital is MPKf=100-K, where K denotes the future capital stock. The price of capital is 100, the depreciation rate of capital is 0.1 and the current capital stock is 10. An equation relating desired investment (I) to real interest rate (r) is
Consider a loanable funds market of Pakistan. Suppose, if government want to implement the policy to provide incentives on savings by allowing people to shield their savings by opening Retirement Accounts with commercial banks. What is the effect of this policy on the market for loanable finds Interest rate will (Please write one word either increase or decrease in the blank). Quantity of loanable funds will (Please write one word either increase or decrease in the blank) Now assume, the parliament passed a tax reform aimed at making investment more attractive—for instance, by instituting an investment tax credit. An investment tax credit gives a tax advantage to any firm building a new factory or buying a new piece of equipment What is the effect of this policy on the market for loanable finds Interest rate will (Please write one word either increase or decrease in the blank). Quantity of loanable funds will (Please write one word either increase or decrease in the blank)
Consider a loanable funds market of Pakistan. Suppose, if government want to implement the policy to provide incentives on savings by allowing people to shield their savings by opening Retirement Accounts with commercial banks. What is the effect of this policy on the market for loanable finds Interest rate will (Please write one word either increase or decrease in the blank). Quantity of loanable funds will (Please write one word either increase or decrease in the blank) Now assume, the parliament passed a tax reform aimed at making investment more attractive—for instance, by instituting an investment tax credit. An investment tax credit gives a tax advantage to any firm building a new factory or buying a new piece of equipment What is the effect of this policy on the market for loanable finds Interest rate will (Please write one word either increase or decrease in the blank). Quantity of loanable funds will 8(Please write one word either increase or decrease in the blank)
What would happen in the market for loanable funds if the government were to increase the tax on interest income? A) Real interest rates would rise. B) Real interest rates would be unaffected C) Real interest rates would fall. D) The effect on the real interest rate is uncertain.
Show the effect on the real interest rate and equilibrium quantity of loanable funds of a decrease in the demand for loanable funds and a smaller decrease in the supply of loanable funds. Draw a demand for loanable funds curve. Label it DLF0. Draw a supply of loanable funds curve. Label it SLF0. Draw a point at the equilibrium real interest rate and quantity of loanable funds. Label it 1. Draw a curve that shows a decrease in the demand for loanable funds. Label it DLF1. Draw a curve that shows a smaller decrease in the supply of loanable funds. Label it SLF1. Draw a point at the new equilibrium real interest rate and quantity of loanable funds. Label it 2.
Suppose the real interest rate is higher than the equilibrium interest rate. We can predict that a. The real interest rate will decrease to encourage investment and discourage saving b. The real interest rate will increase to discourage investment and encourage saving c. The real interest rate will decrease to discourage investment and encourage saving d. The real interest rate will increase to encourage investment and discourage saving
. Triniland is recognized as a high-income economy by the World Bank. Assume that households in Triniland decide to increase their savings for retirement. Using a correctly labelled diagram of the loanable funds market, show how the increase in savings will affect the equilibrium real interest rate. Based on the real interest rate change identified in part (a), what will happen to Triniland’s purchases of foreign assets? Explain. Consider the foreign exchange market for Triniland’s currency.
Japan and the United States are major trading partners and the exchange rate between the Japanese yen and the United States dollar is determined in a flexible foreign exchange market. (c) Assume instead household savings increased in the United States. Draw a correctly labeled graph of the loanable funds market in the United States, and show the effect of the increase in household savings on the equilibrium real interest rate. (d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to financial capital flows to the United States?
Japan and the United States are major trading partners and the exchange rate between the Japanese yen and the United States dollar is determined in a flexible foreign exchange market. (c) Assume instead household savings increased in the United States. Draw a correctly labeled graph of the loanable funds market in the United States, and show the effect of the increase in household savings on the equilibrium real interest rate. (d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to financial capital flows to the United States? (e) Based on your answer to part (d), what will happen to the international value of the dollar in the foreign exchange market? Explain. (f) Based on your answer to part (e), will the Federal Reserve buy or sell yen in the foreign exchange market to stabilize the dollar/yen exchange rate? Explain.
Japan and the United States are major trading partners and the exchange rate between the Japanese yen and the United States dollar is determined in a flexible foreign exchange market. (c) Assume instead household savings increased in the United States. Draw a correctly labeled graph of the loanable funds market in the United States, and show the effect of the increase in household savings on the equilibrium real interest rate. (d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to financial capital flows to the United States? (e) Based on your answer to part (d), what will happen to the international value of the dollar in the foreign exchange market? Explain. (f) Based on your answer to part (e), will the Federal Reserve buy or sell yen in the foreign exchange market to stabilize the dollar/yen exchange rate? Explain. ONLY ANSWER TO F
The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario. (graph in image) Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to (a. fall, b. rise) and the level of investment spending to (a. increase, b. decrease). Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases…