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) Using the long-run model discussed in chapter 3, suppose you’re given the following information: • The consumption function is given by C = 50 + 0.6 (Y − T). • The investment function is given by I = 155 − 5r. • The production function is given by F (K, L) = 3K1/3L 2/3 . • K¯ = 512, L¯ = 125, T¯ = 150, and G¯ = 160. (a) (6 marks) Find the equilibrium real interest rate, r, using the goods market-clearing condition (Y = C + I + G). (b) (2 marks) Find private savings SP r, public savings SP ub, and national savings S = SP r + SP ub. (c) (5 marks) Find r using the loanable funds market-clearing condition (S = I). (d) (4 marks) Plot the supply and demand for loanable funds, with S,I on the x-axis and r on the y-axis. Be sure to label all axes, intercepts, slopes, and the equilibrium point. (e) (3 marks) Suppose a change in sentiment causes businesses to be more sensitive to an increase in the interest rate. In particular, suppose the investment function becomes I = 155 − 7r. Find the new equilibrium real interest rate in the market for loanable funds. (f) (2 marks) In the plot you drew in part (d), show how the change in the investment function affects the market for loanable funds.
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