1. Suppose the one-year T-bill rate was 8% on 1/1/92, 7% on 1/1/93, and 6% on 1/1/94. Suppose also that the GDP deflator (1986 dollars) was 150 on 1/1/92, 159 on 1/1/93, 165.4 on 1/1/94, and 173.6 on 1/1/95. The tax rate on interestincome is 30%.

(a) Calculate the after-tax nominal rate of return for 1992, 1993, and 1994.

(b) If you began with 1000 on 1/1/92 and invested in T-bills each year (paying taxes at the end of each year), how much would you have in nominal terms on 1/1/95? How much would you have in real terms (1986 dollars)?

(c) What are your nominal and real interest earnings over the three year period?

2. Suppose you divide your life into two periods -- working age and retirement age. When you work, you earn labour income Y; when retired, you earn no labour income, but must live off your savings and the interest it earns. You save the amount S while working, earning interest rate r, so you have (1+r) to live on when retired. Suppose also that you want to set consumption twice as high when working as when retired.

(a) Suppose you earn 1 million over your working life, and the real interest rate for retirement saving is 50%. How much will you save and how much will you consume in each part of your life?

(b) Suppose your current income went up to $2 million when working. Now what will you save and how much will you consume each period?

(c) Suppose the Canada Pension Plan will pay you 25% of your working income when you are retired. Now, with Y = $1 million as in part (a), how much will you save and how much will you consume each period?

(d) Suppose the interest rate rises (starting from the situation in part (a)). Will you save more or less?

3. Suppose that federal and provincial governments stop collecting personal taxes by deducting them from paycheques. In the new scheme, tax rates are unchanged, but now all tax is payable at the end of the tax year. How would consumption and saving respond to this change?

4. Consider a Keynesian consumption function with desired consumption equal to 0.9Y, where Y is income. Government purchases are 1000, net exports are zero, and desired investment varies with the real interest rate according to the following schedule:

        r         I

        5         3000
        4         3500
        3         4000
        2         4500

Assume the interest rate adjusts so that the economy is in equilibrium. Equilibrium output at `full employment' is 50,000. Find the equilibrium values of consumption, investment, and the real interest rate.

5. Suppose a country has the following balance of payments data:

Merchandise exports 100
Merchandise imports 130
Service exports 60
Service imports 50
Investment income 75
Investment payments 100
Transfers abroad 15
Increase in home assets abroad 130
Increase in foreign assets at home 190

(a) Calculate the current account balance.

(b) Calculate the capital account balance.

(c) Calculate the trade balance.

(d) Calculate net factor payments.

6. Consider a small open economy in equilibrium with zero current account balance. What happens to national saving, investment, and the current account balance in equilibrium if:

(a) future income rises?

(b) business taxes rise?

(c) government purchases decline temporarily?

(d) the future marginal product of capital rises?

1. (a) 5.6%; 4.9%; 4.2%

(b) $1154.27; $664.90

(c) $154.27; -$1.77

2. (a) $S=250,000; cw = 750,000; cr = 375,000.

(b) S=500,000; cw = 1,500,000; cr = 750,000.

(c) S=125,000; cw=875,000; cr=437,500.

(d) The basic equation is (3+2r)S=Y. Thus as r rises S declines with Y held fixed.

3. This is just Ricardian equivalence. Consumption would not change, but saving would increase to offset the postponement of tax collections.

4. r=3%; I=4000; C=45,000.

5. (a) -60 (b) 60 (c) -30 (d) -25

6. (a) Saving curve shifts left. S falls, I unchanged, CA falls.

(b) Investment curve shifts left. S unchanged, I falls, CA rises.

(c) Saving curve shifts right. S rises, I unchanged, CA rises.

(d) Investment curve shifts right. S unchanged, I rises, CA falls.