Macroeconomics (6th Edition)
6th Edition
ISBN: 9780134106229
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 11, Problem 11.1.5PA
To determine
The interest rates earned.
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Regarding the previous page, consider you and your partner are able to sell your current property and invest in a small guest house in Blackpool, a seaside resort in the UK, for the same amount of money. The guest house has eight double bedrooms. It is a bit run down. You currently work as a school teacher and your partner has been unemployed for a number of years. Outline the factors that would determine whether or not this is a good investment taking in consideration the opportunity cost and that your business partner is unemployed.
Please draw what the market for loanable funds and labour market diagrams will look like using the descriptions below.
The market of loanable funds can be represented by a simple supply and demand diagram, where the supply of loanable funds represents savings, and the demand for loanable funds represents investment. The real interest rate is determined at the intersection of the supply and demand curves.
The labour market can be represented by a simple supply and demand diagram, where the supply of labour represents the number of workers available for employment, and the demand for labour represents the number of jobs available. The real wage rate is determined at the intersection of the supply and demand curves.
This question addresses the impact of saving on an economy by examining what happens if tax laws change to induce saving and how changes in tax laws can discourage saving.
The following graph shows the market for loanable funds.
Show the impact of a change in the tax law that successfully encourages saving by shifting either the demand curve (D), the supply curve (S), or both.
A tax law change that successfully encourages saving will (increase/decrease) interest rates, which leads to (less/more) investment and economic growth.
To better understand how changes in tax laws can affect saving, suppose that Madison, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Madison's parents are so impressed with her plans that they offer to pay her an additional 30% interest per month on the money she saves, which means that Madison is now earning a large rate of return on her saving. By the end of the…
Chapter 11 Solutions
Macroeconomics (6th Edition)
Ch. 11 - Prob. 11.1.1RQCh. 11 - Prob. 11.1.2RQCh. 11 - Prob. 11.1.3PACh. 11 - Prob. 11.1.4PACh. 11 - Prob. 11.1.5PACh. 11 - Prob. 11.1.6PACh. 11 - Prob. 11.1.7PACh. 11 - Prob. 11.1.8PACh. 11 - Prob. 11.2.1RQCh. 11 - Prob. 11.2.2RQ
Ch. 11 - Prob. 11.2.3RQCh. 11 - Prob. 11.2.4RQCh. 11 - Prob. 11.2.5RQCh. 11 - Prob. 11.2.6PACh. 11 - Prob. 11.2.7PACh. 11 - Prob. 11.2.8PACh. 11 - Prob. 11.2.9PACh. 11 - Prob. 11.2.10PACh. 11 - Prob. 11.2.11PACh. 11 - Prob. 11.2.12PACh. 11 - Prob. 11.3.1RQCh. 11 - Prob. 11.3.2RQCh. 11 - Prob. 11.3.3PACh. 11 - Prob. 11.3.4PACh. 11 - Prob. 11.3.5PACh. 11 - Prob. 11.3.6PACh. 11 - Prob. 11.4.1RQCh. 11 - Prob. 11.4.2RQCh. 11 - Prob. 11.4.3RQCh. 11 - Prob. 11.4.4PACh. 11 - Prob. 11.4.5PACh. 11 - Prob. 11.4.6PACh. 11 - Prob. 11.4.7PACh. 11 - Prob. 11.4.8PACh. 11 - Prob. 11.4.9PACh. 11 - Prob. 11.4.10PACh. 11 - Prob. 11.4.11PACh. 11 - Prob. 11.4.12PACh. 11 - Prob. 11.5.1RQCh. 11 - Prob. 11.5.2RQCh. 11 - Prob. 11.5.3PACh. 11 - Prob. 11.5.4PACh. 11 - Prob. 11.5.5PACh. 11 - Prob. 11.5.6PACh. 11 - Prob. 11.5.7PACh. 11 - Prob. 11.5.8PACh. 11 - Prob. 11.1RDECh. 11 - Prob. 11.2RDECh. 11 - Prob. 11.3RDE
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- Suppose that the government is concerned with the unemployment rate and, as a response, offers a tax credit to any firm that builds a new factory in the United States. Show the effect of this policy on the market for loanable funds by shifting the appropriate curve in the graph in the attached image.arrow_forwardSuppose the people in a certain economy decide to stop saving and instead use all their income for consumption. They do nothing to add to their stock of human or physical capital. Discuss the prospects for growth of such an economy.arrow_forwardDistinguish between saving and investment.arrow_forward
- Three students have each saved $1000. Each has an investment opportunity in which he or she can invest up to $2000. Here are the rates of return on the students’ investment projects: Harry 5 percent Ron 8 percent Hermione 20 percent If borrowing and lending are prohibited, so each student can use only personal saving to finance his or her own investment project, how much will each student have a year later when the project pays its return? Now suppose their school opens up a market for loanable funds in which students can borrow and lend among themselves at an interest rate r. What would determine whether a student would choose to be a borrower or lender in this market? Among these three students, what would be the quantity of loanable funds supplied and quantity demanded at an interest rate of 7 percent? At 10 percent? At what interest rate would the loanable funds market among these three students be in equilibrium? At this interest rate, which student(s)…arrow_forwardSuppose that the government changes the tax code to allow additional amounts of money to be placed in 401(k) retirement accounts, increasing the extent to which people can delay their tax obligations. Show the effect by shifting the appropriate curve in the market for loanable funds.arrow_forwardYou have been tasked with developing a research report based on an economy of your choice anywhere in the world. The economy you select should be a growing economy or an economy that has experienced growth at some stage in its development. Present the finding of your research under the following headings. CRITICAL INDSUTRIES Identify the industry (industries) that are strategically important and critical for economic growth in your chosen economy. Provide a brief background into the nature of each of these industries and their contribution to the economy as a whole. Limit your discussion to two industries. (150 - 200 words)arrow_forward
- Let us use what we have learned in the first part of the chapter to compare living standards in the United States and a hypothetical country, Argonia, in 2008. The U.S. GDP in 2008 was approximately $14 trillion, and the U.S. population was approximately 300 million. What was the per capita GDP in the United States in 2008? Suppose that in the local currency, Argonian dollars, Argonia’s GDP in 2008 was 1 trillion, and its population was 10 million. What was Argonia’s GDP per capita in Argonian dollars? What problems do you foresee in comparing this number to the U.S. GDP per capita in U.S. dollars computed in part (a)? The Argonian dollar/U.S. dollar exchange rate was equal to 6 on January 1, 2008 (meaning that 1 U.S. dollar was worth 6 Argonian dollars) and reached 9 on August 1, 2008. Compute an exchange-rate-based measure of the GDP per capita in Argonia in U.S. dollars on these two dates. Do you think the change in Argonia’s exchange-rate-based measure of GDP per capita…arrow_forwardWhy is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other fifinancial institutions play in aiding the growth process?arrow_forwardConsider a loanable funds market of Pakistan. Suppose, if government want to implement the policy to provide incentives on savings by allowing people to shield their savings by opening Retirement Accounts with commercial banks. What is the effect of this policy on the market for loanable finds Interest rate will (Please write one word either increase or decrease ) Quantity of loanable funds will(Please write one word either increase or decrease) Now assume, the parliament passed a tax reform aimed at making investment more attractive—for instance, by instituting an investment tax credit. An investment tax credit gives a tax advantage to any firm building a new factory or buying a new piece of equipment What is the effect of this policy on the market for loanable finds Interest rate will (Please write one word either increase or decrease) Quantity of loanable funds will((Please write one word either increase or decrease)arrow_forward
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