Name __________________________ _________ last 4 PSU ID _______

Section 001 11:15 SPARKS MWF

Spring 2011 Chuderewicz

YOU MUST USE THIS AS A TEMPLATE – NOTEBOOK PAPER IS NO LONGER ACCEPTED - MAKE SPACE FOR YOUR ANSWERS BY HITTING ENTER (you certainly don’t need to type this assignment)– LEAVE THE QUESTIONS AS THEY ARE – AND PLEASE STAPLE! ALSO, PLEASE PUT THE FIRST TWO LETTERS OF YOUR LAST NAME IN THE TOP RIGHT HAND CORNER OF THIS PAGE SO THAT WE CAN ALPHABETIZE THESE EASILY. THANKS IN ADVANCE!

Economics 304

Homework #4 – Desired Capital, User Cost and Goods Market Equilibrium

Due Wednesday, 2/16 at the beginning of class – no late papers accepted!

Instructions: Please show all work or points will be …show more content…
b) Now solve for the goods market clearing interest rate. Please show all work.
Draw a desired savings/investment diagram locating this initial equilibrium and point A.
[pic]
A correct and completely labeled diagram is worth 10 points

We now have a change in the desired investment function – it is now:

Id = 650 - 400r

c) Name four reasons why the desired investment function would change the way did.

You can do this!
d) Resolve for the goods market clearing interest rate and the associated levels of desired savings and investment.

Add this development to your diagram and label as point B.

e) (10 points – discussion = 5 and correct and completely labeled diagram = 5) Choose one and only one of the reasons from part c and show the movement from point A to point B using a user cost – MPKf diagram. Please be clear on which of the 4 reasons from c) you are using.

[pic]

f) What has happened to the level of desired consumption and why? Be sure to refer to the substitution effect in your answer!

It got crowded out! 30 units – since Y stays the same – rates have to rise to get people to substitute away from current consumption towards future