Assignment 3 Econ Essay example

1059 Words Apr 1st, 2015 5 Pages
Assignment 3: Economics 202
Problems for Chapter 13
1. Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year:

Economists also estimate that the investment function is:

where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving, national saving, investment, and the equilibrium interest rate. Please note: national savings is not related to the interest rate, which means that the supply curve for loanable funds is vertical. (15 points)

Private Savings= Y-T-C 10000-1500-6000= 2500
Public Saving= T-G 1500-1700= -200
National Saving= S=(Y-T-C)+(T-G)=(10000-1500-6000)+(1500-1700)= 2300
Investing= I=Y-C-G
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The interest rate will decrease while the savings and investments will increase. Which will let the economy growth for the future, ii. Problems for Chapter 14
3. According to an old myth, Native Americans sold the island of Manhattan 400 years ago for $24. If they had access to a financial investment that yielded an interest rate of 7% per year, how much would they have today? (8 points)
a. (1.07)^400 x 24= $13.6 Trillion

4. For each of the following kinds of insurance, give an example of a behavior that can be called moral hazard and another example of behavior that can be called adverse selection:
a. Medical insurance (6 points)
i. A sick person is more likely to apply to medical insurance compared to a healthy person. Meaning it’s an adverse selection. A healthy person may get health insurance too but now he may less likely to take care of himself, this would be a moral hazard.
b. Car insurance (6 points)
i. A risky driver is more likely to apply for car insurance, this would be an adverse selection. Or once a driver has insurance, they may be driving more reckless, this would be a moral hazrd.

5. For each of the following pairs of bonds, which bond would you expect to pay a higher interest rate? Explain. (5 points each)
a. A bond of the US government or a bond of an Eastern European government
i. Eastern European because non-US bonds will include risk premiums and also have higher interest rates
b. A bond that repays

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