Classical theory and equilibrium in the loanable funds

1.Classical theory of distribution to the factors of production: According to Classical economics, what is the impact on the real wage and the real rental price of capital of each of the following events:

a) A wave of immigration increases the labor force.

b) An earthquake destroys some of the capital stock.

c) High inflation doubles the prices of all factors and the price of output in the economy.

d) A technological advance allows the economy to produce 10% more output for any given

combination of capital and labor. (This would be an increase in the production function F.)

2.Equilibrium in the loanable funds and goods markets: Suppose that the economy begins in equilibrium in the loanable funds and goods market. Then, the government decides to increase its purchases without changing taxes. According to the Classical model:
a)How do the supply and demand for loanable funds in the loanable funds market shift?

Draw a diagram to show what happens to interest rates and investment in the new equilibrium.

b) How do the supply and demand for goods in the goods market shift? Draw a diagram to show what happens to the interest rate and output in equilibrium.

c)In the new equilibrium, what has happened to government purchases G? To output Y? To taxes T? To consumption C? To investment I?

3.Equilibrium in the loanable funds and goods markets, pt. 2: Again, suppose that the economy begins in equilibrium in the loanable funds and goods market. Now suppose that businesses become more worried about the economy and decide that they want to invest less at every real interest rate r. According to the Classical model:

a)How do the supply and demand for loanable funds in the loanable funds market shift? Draw a diagram to show what happens to interest rates and investment in the new equilibrium.

b) How do the supply and demand for goods in the goods market shift? Draw a diagram to show what happens to the interest rate and output in equilibrium.

c) In the new equilibrium, what has happened to government purchases G? To output Y? To taxes T? To consumption C? To investment I?

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