Universidad Carlos III de Madrid – Department of Economics
Principles of Economics - Problem Set 9
These answers and solutions are only a general guide because they are preliminary.
Conceptual Questions
Write down a short and concise answer. When you are asked to solve the question in class,
explain the concept clearly and give examples or pieces of evidence.
1. Why we say that national savings are equal to investment? What assumption is
crucial for the statement being true?
The crucial assumption is that of a closed economy where NX=0. National Savings
equal private savings plus public savings. The first one (private spendings) equals
Y-T-C and the second (public savings) is T-G. Therefore, national savings are S=Y-
C-G. This equation combined with the identity Y=C+I+G of a closed economy,
implies that S=I. Savings are identified with income.
2. Why the supply of loanable funds has a positive slope and the demand for loanable
funds has a negative slope?
It is more attractive to save when the interest rate is high, the supply of funds is
higher. It is more costly to borrow when interest rates are higher, investment is the
demand of funds.
3. What is the difference between the natural rate of unemployment and the rate of
unemployment during a recession? (Cyclical unemployment)
Natural rate of unemployment: unemployed people that aren’t looking for a job or
that are not old enough to look for one.
The additional unemployment due to jobs being lost in the recession.
4. Is true that if a person losses her/his job, unemployment rate always increases?
No, if the person finds another job within four weeks or the person does not look
for a job, or if the job is given to an unemployed person, the unemployment rate
does not change.
Unemployment rate=number of unemployed/labor force
Labor force=employed+unemployed
5. Explain why can be the case that some prices increase but the CPI does not
increase.
If the product is not included in the basket of representative goods or the prices of
some other goods have decreased so that the cost of the basket is constant.
6. Why an increase of 10% in the price of bread will have a larger impact than an
increase of 10% in the price of salt.
Bread has more weight in the basket of goods considered in CPI than salt.
Problems
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