Some comments on problem set #3

Here are some comments on the homework problems.

Problem 1. This is essentially right out of your notes.

Problem 3. This was clearly discussed in class.

Problem 4. Here is an exerpt from an email inquiry and my response:

***********************************************************************

>On problem #4 on the homework assignment, when it says that Japanese
>investors made significant direct and potfolio investments in the
>U.S. does this mean that they bought U.S. stock as well as build
>Japanese companies within the U.S.?


That is exactly right.

portfolio: buying stock and bonds
direct: building factories

(as an aside, technically speaking if a foreign individual or firm
buys more than 10% equity in a U.S. firm that would be considered
"direct" rather than merely "portfolio" investment.)

**********************************************************************

Problem 5. In class I demonstrated how a little algebra will help you solve for these values. You must make use of the following relationships:

National Saving = private saving + public saving

The equilibrium condition is National Saving = Investment

public saving = taxes - government spending

finally, Y = C + I + G.

Keep in mind, this is a "closed economy" so we ignore the foreign sector.

Problem 6. This one was discussed in class. It is important to note there are 2 things to consider in this problem and how they affect supply and demand for loanable funds. You should show both changes on one diagram. Be sure to draw conclusions regarding changes in the interest rate and the equilibrium S=I.