Week 2: Topic and Questions

In this class, we will review national income and related issues. These will also serve as the basis of other topics we will cover later. In addition to covering determinants of total output/income and its distribution, we will analyze the market for loanable funds. Please study Lecture Note 2 under Course Material” (link: ).

Please answer the following questions and pay careful attention to the instructions.

Question 1: What determines the amount of output an economy produces? Also, describe Cobb-Douglas production functions. Note: In addition to the lecture note, you can also check the following Khan Academy video:

Question 2: Choose one of the government policy changes described below (option 1 or 2 or 3) and analyze its effect on the loanable funds market. In addition to the lecture note, you can also check the following Khan Academy video:

• Option 1: As part of fiscal expansionary policy, suppose there is a massive increase in government spending, e.g., infrastructure spending.
• Option 2: As part of fiscal contractionary policy, suppose there is a massive decrease in government spending.
• Option 3: Suppose a government decides to subsidize more investment, e.g., an investment tax credit.

1. Draw the diagram for the loanable funds model (Please draw by hand or use computer paint or similar software). Assume that the supply curve (national saving) is vertical and does not depend on the interest rate.
2. How does this policy affect the supply and demand for loanable funds? Which curve does it shift? Note: shift only 1 curve (either saving or investment curve).
3. Compare the old and new equilibria. What happens to the equilibrium interest rate?

Instructions:

• Please give a complete answer to each question.
• You can either attach a file or insert an image of your drawing into the message area of the Discussions. Please draw by hand or use computer paint or similar software.
• If you use online sources, you need to properly cite them by providing a link/URL. Besides using the study material and links, please give your own opinion and share your thoughts.
• You must also comment on at least one other students answer: check their answer and provide feedback.
• When the instructor comments and asks you a question, please respond!

Reading/Study Material:

• Lecture Note 2 posted under Course Material.
• Mankiw Textbook: Chapter 3.
• Online sources (link is given above).__