PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Question
Chapter 11, Problem 6P
(a)
To determine
Determine the changes in the real interest rate and capital investment when the investment opportunities improve the technologies.
(b)
To determine
Determine the changes in the real interest rate and capital investment when the government has deficit budget.
(c)
To determine
Determine the changes in the real interest rate and capital investment when the domestic saving increases.
(d)
To determine
Determine the changes in the real interest rate and capital investment when the foreign investors believe that the riskiness of lending to the country has increased.
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For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain!
a). a bond of the U.S. government or a bond of an East European government
b). a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040
c). a bond from Coca-Cola or a bond from a software company you run in your garage
d). a bond issued by the federal government or a bond issued by New York State
Find a quote below and illustrate the effect of these phenomena on the world market for loanable funds. Make sure to explain the change of the equilibrium price and quantity of loanable funds.
“Many Economists worry that the aging populations of industrial countries are going to start running down their savings just when the investment appetite of emerging economies, mostly in East Asia, is growing”.
For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain!
a bond of the U.S. government or a bond of an East European government
a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040
a bond from Coca-Cola or a bond from a software company you run in your garage
a bond issued by the federal government or a bond issued by New York State
2. Many workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person not want to hold stock in the company where he works?
3. Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year: Y = 10,000; C = 6,000; T = 1,500; G = 1,700. The economists also estimate that the investment function is: I =3,300 –100r where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving,…
Chapter 11 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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Similar questions
- A country recently had $800 billion worth of domestic investment and its residents purchased $400 billion worth of foreign assets. If foreigners purchased $100 billion of this country’s assets, what was this country’s saving? Explain how you found your answer.arrow_forwardConsider the following data (in billion $) for a country in a particular year: (assume this country has Zero Transfer Payment Personal consumption expenditure (C) 200 Exports (x) 10 Government Purchases of goods and services (G) 120 Imports (m) 15 Gross Domestic Product (Y) 1800 Taxes 20 g. Dose the government has deficit, balance or surplus budget? h. What is the amount of investment financed by national saving? i. What is the amount of investment financed by borrowing from rest of the world? J. What is the meaning of transfer paymentarrow_forwardExplain why you think that maintaining a well functioning financial system is important and suggest some policies the government could adopt to help improve long-run economic growth through this channel.arrow_forward
- Let's say that due to political turmoil in the US and abroad, people all over the world start to lose confidence in American securities. Both Americans and foreigners prefer to do their financial investment elsewhere. As a result, we'd expect the supply of loanable funds to shift to the right and the real interest rate to fall the supply of loanable funds to shift to the left and the real interest rate to rise the supply of bonds to shift to the right and the real interest rate to fall the supply of bonds to shift to the left and the real interest rate to risearrow_forwardGraphically Show each scenario of the market for loanable funds and graph the supply and demand for each of the 4 scenarios. Draw the shift occurring (Supply or Demand) and explain what happens to the equilibrium interest rate in for each of the 4 scenarios 1. A breakthrough in medical technology results in many hospitals wanting to buy new equipment. 2. The government budget deficit is reduced by 50%. 3. Foreign investors buy residential property in the United States. 4. People around the world are worried about financial stability in their countries and choose to move their wealth to U.S. financial markets.arrow_forwardThe following graphs depict the market for loanable funds and the relationship between the real interest rate and the level of net capital outflow (NCO) measured in terms of the Mexican currency, the peso. The Market for Loanable Funds in MexicoDemandSupply012345678987654321REAL INTEREST RATE (Percent)LOANABLE FUNDS (Billions of pesos)Demand Supply Mexican Net Capital OutflowNCO-4-3-2-10123456987654321REAL INTEREST RATE (Percent)NET CAPITAL OUTFLOW (Billions of pesos)NCO Complete the first row of the table to reflect the state of the markets in Mexico. Real Interest Rate Net Capital Outflow (NCO) (Percent) (Billions of pesos) Initial state After capital flight Now, suppose that Mexico experiences a sudden bout of political turmoil, which causes world financial markets to become uneasy. Because people now view Mexico as unstable, they decide to pull some of their assets out of Mexico and put them into more…arrow_forward
- Draw a graph of the supply and demand of loanable funds. Then, show how the interest rate will be affected when the following scenarios occur: a. The government implements a program that reduces investment tax credits. b. The government budget deficit is reduced by 30%. (Hint: Does the government still need to borrow?) c. More foreigners are saving their money in U.S. banks.arrow_forwardUsing the framework of the supply and demand of loanable funds, analyze the possible effect on the equilibrium interest rate in the U.S. in each of the following independent, hypothetical scenarios. a. The economy heats up, leading to higher wages and decreased unemployment. b. Concerned that the credit rating of US Treasury securities will be downgraded, international investors move some money out of the US. c. Congress approves a budget that decreases spending and increases tax rates, thereby driving the deficit downarrow_forwardWhere does the demand for loanable funds come from in a closed economy? How does a government adopting a policy of taxing investment from the private sector impact the demand for loanable funds? What happens to the equilibrium interest rate following this policy? Illustrate using the supply and demand in the market for loanable funds.arrow_forward
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