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UW-Madison ECON 102 - Quiz 3

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Economics 102 Name __________________________________Summer 2011Quiz #3July 5, 2011Please write all answers neatly and in a legible manner. We reserve the right to count as wrong answers any questions that we cannot read. Please show all work.1. (3 points-.25 points each) Fill in the blanks for this question. Use as possible answers “An increase”, “A decrease”, or “no change”. a. Holding everything else constant, the government increases its spending by $500 and its tax collectionsby $200. In the loanable funds market there will be ___________________ in the interest rate___________________ in the level of private savings___________________ in the level of consumption___________________ in investmentb. Holding everything else constant, households decide to save more at every interest rate. In the loanablefunds market there will be ___________________ in the interest rate___________________ in the level of private savings___________________ in the level of consumption___________________ in investmentc. Holding everything else constant, country Y’s exports increase by $300 while its imports increase by $400. In the loanable funds market there will be ___________________ in the interest rate___________________ in the level of private savings___________________ in the level of consumption___________________ in investment2. (1.5 points-.25 points each) Answer true or false in each of the following blanks. Suppose an economy’s level of capital and technology are fixed. If the economy increases its hiring of labora. Labor productivity will increase ______________________b. Real GDP will increase ___________________________c. Capital productivity will decrease __________________d. Marginal productivity of capital definitely decreases ____________________e. Marginal productivity of labor decreases __________________f. The aggregate production function will shift up if the aggregate production function is graphed with real GDP on the vertical axis and capital on the horizontal axis ___________________13. (5.5 points) Suppose you are told that the demand for loanable funds for investment is given by the equation I = 1000 – 100rand the supply of loanable funds from private savings is given by the equation Sp = 100rwhere I is investment spending, r is the interest rate expressed as a whole number, and Sp is the quantity of private saving. Assume initially that the government has a balanced budget and the trade balance is equal to zero. a. (1 point) What is the equilibrium interest rate and quantity of loanable funds given the above information?b. (2.5 points) Now, suppose you are told that government spending equals 100 while net taxes equals 50. Find the new equilibrium interest rate and the equilibrium quantity of private saving given this information. Show and explain your work to get full credit for your answer. c. (2 points) Illustrate part (a) and part (b) with a well labeled graph. Be sure to label the two axes, the initial equilibrium and the new equilibrium.


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UW-Madison ECON 102 - Quiz 3

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