Economics 201 Spring 2015 Dr. Neri Homework 2, due at the beginning of discussion on Friday February 27, 2015. Late submissions and e-mail submissions will not be accepted. 1. Assume that in the classical / long-run model (where the loanable funds market always clears), the equation for household saving is S = 300 + 3,000r and the equation for planned investment spending is IP = 800 – 1,000r, where r is the interest rate in decimal form, and all other variables are measured in billions of dollars. a.) If G = T = 100 (i.e., both government purchases and net taxes are equal to $100 billion, the budget is balanced), calculate the equilibrium interest rate and the equilibrium quantity of loanable funds. b) Now assume the government increases spending to 140, G = 140 (i.e., $140 billion) and T is unchanged at T = 100 (i.e., $100 billion), calculate the equilibrium interest rate and the equilibrium quantity of loanable funds. Calculate the change in S, C and IP. c) Present a graph of the loanable funds showing the equilibrium from part (a) and the equilibrium from part (b). Describe the effect on S and IP resulting from the increase in G. 2. Chapter 8, end of chapter question No. 1. 3. Chapter 9, end of chapter question No. 5. The question ask you to “Graphically illustrate the full impact of the decrease in the nation’s capital stock”. Use the production function graph with L on the horizontal axis. The production function will shift - label this as a movement from A to B. This will be followed by a movement along the new production function – label this as a movement from B to C.