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 I = 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

i.) 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

B. 2

C. 5

D. 4

iii.) The new equilibrium level of investment in Fundlandia is:

A. 500

B. 200

C. 400

D. 300

Answer 1