Question

1. Assume that the residents of a nation become more patient (experience a reduction in their time preferences). a. What will happen to the interest rate in that nation? What will happen to the equilibrium level of investment in that nation? Explain your answers. b. In the long run, how will the lower time preferences affect the levels of capital and income growth in that nation? 3. Use the Fisher equation to fill in the blanks in the following table: Inflation rate Real interest rate Nominal interest rate 2% 0% 7% 7% 2% 9% 2% 10% 2% 2%

Answer 1

1) Resident became more patient

a) As residents became more patient which means that they can wait for buying a good rather than buying it at earliest date possible. This make resident less responsive to the rate of interest. If the interest rate is large, resident would lack more interest in taking loan from banks as they are patient and can wait for buy things. This would make bank reducing rate of interest to give a incentive to resident to take loans. As rate of interest have fallen, investment would rise due to the negative rate of interest between investment level and rate of interest.

b) Capital is the amount of money producers/residents keep in their account to use in case they want to expand their business in future or for emergency purposes. As residents are more patient which would help them saving money and raising capital in the economy. As capital is rising with investment level rising, the nation growth would also rise with it.

2) Nominal interest rate = Real interest + Inflation rate

The numbers in the table is in percentage.

Inflation rate	Real Interest rate	Nominal interest rate
5	2	7
7	0	7
2	4	6
9	-3	6
2	2	4
10	2	12