a. The major economic functions of the interest rate areO to provide market incentives for saving and to encourage international capital flows.O to influence investment and domestic output and to provide market incentives for saving.O to provide market incentives for saving and to allocate money capital to its most productive uses.O to influence investment and domestic output and to allocate money capital to its most productive uses.b. Many businesses finance their investment activities internally. Should internal financing affect the efficiency with which the interestrate performs its functions?O No, because internal financing relies on a different profit calculation.O Yes, because firms are usually more anxious about what happens to money that they do not have to pay back.O No, investment is profitable if the expected rate of return is greater than the rate of interest regardless of the source of funds.O Yes, investment is profitable if the expected rate of return is greater than the rate of interest regardless of the source of funds.

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Answered: a. The major economic functions of the…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter21: Financial Markets, Saving, And Investment

Section: Chapter Questions

Problem 9P

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A booming economy can attract financial capital inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic recession. Is a country whose economy is booming because It decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom Is caused by economic investment expenditure?
Question 4Every country, including Canada and the US, has used foreign borrowing to industrialize and develop its economy. These long-term loans are classified as foreign direct investment (FDI) and portfolio investment. Explain fully the difference between these two types of loans, including implications for risk and sovereignty. Provide examples of each type. Explain as fully as possible how short-term capital flows are different from long-term capital flows. Give examples of each. For your long-term examples try to use different examples, such as real estate, than those you provided for short-term capital flows.
Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 40 30 -20 6 35 35 -15 5 30 40 -10 4 25 45 -5 3 20 50 0 2 15 55 5 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. Because of the relationship between net capital outflow and net…
Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 50 30 -20 6 45 40 -15 5 40 50 -10 4 35 60 -5 3 30 70 0 2 25 80 5 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. Market for Loanable…
Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 40 25 -15 6 35 30 -10 5 30 35 -5 4 25 40 0 3 20 45 5 2 15 50 10 On the following graph, plot the relationship between the real interest rate and net capital outflow by using the green points (triangle symbol) to plot the points from the initial data table. Then use the black point (X symbol) to indicate the level of net capital outflow at the equilibrium real interest rate you derived in the previous graph. Because of the…
Explain how the following transactions would affectU.S. net capital outflow. For each transaction, statewhether it represents direct investment or portfolioinvestment.a. An American cellular phone company establishesan office in the Czech Republic.b. Harrods of London sells stock to the GeneralMotors pension fund.c. Honda expands its factory in Marysville, Ohio.d. A Fidelity mutual fund sells its Volkswagen stockto a French investor.
Effects of a government budget deficit Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 55 25 -10 6 50 35 -5 5 45 45 0 4 40 55 5 3 35 65 10 2 30 75 15 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.
The government in an open economy cuts spendingto reduce the budget deficit. As a result, the interestrate _________, leading to a capital _________ and acurrency _________.a. falls; outflow; appreciationb. falls; outflow; depreciationc. falls; inflow; appreciationd. rises; inflow; appreciation
8.. If domestic saving is less than domestic investment, then investment can be financed by: the budget deficit new savings instruments foreign saving higher rates of inflation higher interest rates
3 In July 2021, a one-year Turkish bond had an interest rate of 18% and the exchange rate between the dollar and the Turkish lira was $1 = 8.68 lira. As of July 2022, the exchange rate has changed to $1 = 17.28 lira. Suppose an American invested $1000 in a one-year Turkish bond in July 2021. What rate of return would she have earned during the year (between July 2021 and July 2022)? Show all work
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4. Relative to a closed economy, it is easier in an open economy toa. pass the burden of government debt on to future generations.b. control interest rates.c. discourage private investment through government borrowing.d. confer monopoly power on key domestic industries.

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