9 Extended Problems -The Economy of Dream Island,which Is Isolated from the Rest

question 132

Essay

9 Extended Problems
$$\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Real interest rate } \\\text { (percent per year) }\end{array} & \begin{array} { c } \text { Supply of } \\\text { loanable funds } \\\text { (2005 dollars) }\end{array} & \begin{array} { c } \text { Demand for } \\\text { loanable funds } \\\text { (2005 dollars) }\end{array} \\\hline 5 & 2,000 & 5,000 \\\hline 7 & 3,000 & 4,000 \\\hline 9 & 4,000 & 3,000 \\\hline 11 & 5,000 & 2,000 \\\hline\end{array}$$
-The economy of Dream Island,which is isolated from the rest of the world,has the supply of loanable funds schedule and the demand for loanable funds schedule shown in the table above.As it happens,all of the supply of loanable funds are from households' saving and the entre demand for loanable funds is from firms' investment demand.
a) Draw the demand and supply curves.
b) What is the equilibrium real interest rate?
c) What is equilibrium investment?
Equilibrium saving?
d) Describe the situation in Dream Island's loanable funds market when the real interest rate is 10 percent.Is there a shortage of loanable funds?
A surplus of loanable funds?
e) Describe the situation in Dream Island's capital market when the real interest rate is 6 percent.Is there a shortage of loanable funds?
A surplus of loanable funds?

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