EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 16, Problem 4DQ
To determine
Interest rate on different types of loans.
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Manipulate the graph to show what will happen to supply and
demand in the market for loanable funds when the
government budget deficit increases, changing the
equilibrium quantity of loanable funds by 3
percentage points.
Ceteris paribus, what is the new interest rate?
interest rate:
Ceteris paribus, private investment would
increase.
not change.
decrease.
%
20
10
9
Supply
8
Interest rate (%)
7
CO
5
LO
3
2
1
0
0
2
Demand
4 6 8 10 12 14 16 18 20 22 24 26 28
Quantity of loanable funds (% of GDP)
The Atlantic Investment Tax Credit is a 10% tax credit
available to businesses that make specific investments in
the Atlantic region and the Gaspe Peninsula. The graph
shows the market for loanable funds.
Show the impact of this tax credit by moving the proper
curve appropriately in the graph.
The new equilibrium interest rate is
The quantity of loanable funds is $
1
Incorrect
5
Incorrect
I
billion
Which statement accurately describes the impact of
the Atlantic Investment Tax Credit?
%
Firms find that more investments are profitable and
increase their demand for loanable funds. As a
result, the interest rate rises.
Interest rate (%)
10
10
3
2
0
0
5
10 15 20 25 30 35
Quantity of loanable funds (in billions)
40
Supply
45
Demand
50
5. LO 2,5 A consumer receives income y in the current period and income y' in the future
period, and pays taxes of t and t' in the current and future periods, respectively. The
consumer can borrow and lend at the real interest rate r. This consumer faces a constraint
on how much he or she can borrow, much like the credit limit typically placed on a credit
card account. That is, the consumer cannot borrow more than x, where x < we-y+t,
with we denoting lifetime wealth. Use diagrams to determine the effects on the consumer's
current consumption, future consumption, and saving of a change in x, and explain your
results.
Chapter 16 Solutions
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- come is included 13. LAST WORD Assume that you borrow $5,000, and you pay back the $5,000 plus $250 in interest at the end of the year. Assuming no inflation, what is the real interest rate? What would the interest rate be if the $250 of interest had been dis- counted at the time the loan was made? What would the inter- est rate be if you were required to repay the loan in 12 equal monthly installments?arrow_forwardThe following table shows the average nominal interest rates on six-month Treasury bills between 1971 and 1975, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1971 to 1975. (All rates are rounded to the nearest tenth of a percent.) Nominal Interest Rate Inflation Rate Year (Percent) (Percent) 1971 4.5 4.2 1972 4.5 3.3 1973 7.2 6.3 1974 8.0 11.0 1975 6.1 9.1 Source: "FRED Economic Data," Federal Reserve Bank of St. Louis, last modified September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org. On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 1971 to 1975. Next, use the green points (triangle symbol) to plot the real interest rates for those years. 8.0 7.0arrow_forwardD Question 26 A corporation issues a bond with a par value of $4,800 in one year. Assume that the bond is sold today for $4,500. What is the interest rate received by the lender? O 3.33% O 11.11% O 6.67% 6.25% D Question 27 The U6 unemployment rate includes which individuals that are not included in the U3 unemployment rate? O government employees O people who volunteer O self-employed individuals O people who are working part-time but want full-time work O members of the population that are under the age of 16arrow_forward
- 4. Does the I in C+I+ G Nx include purchases of stocks and bonds? Why or why not? Lo2 t nnmnonent of I inarrow_forward4. Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in a private closed economy? LO11.5 a. A decline in the real interest rate. b. An overall decrease in the expected rate of return on investment. c. A sizable, sustained increase in stock prices.arrow_forwardQUESTION 19 You lend your sister's daughter $2,000 for a year, if at the end of the year she pays you $2,180. The interest rate you are charging her is O 1.1%. O 9%. O 10%. O 20%.arrow_forward
- Suppose that the demand for loanable funds for car loans in the Milwaukee area is $12 million per month at an interest rate of 1O percent per year, $13 million at an interest rate of 9 percent per year, $14 million at an interest rate of 8 percent per year, and so on. If the supply of loanable funds is fixed at $15 million, what will be the equilibrium interest rate? Instructions: Enter your answer as a whole number. percent per yeararrow_forwardAssume that the global average real interest rate is 5%. Britain witnesses severe inflation, where the current inflation rate is 10%. To curb inflation they decide to increase interest rates to 17%. Then the real rate of interest in Britain is results in increased the US dollar ($). which is for British bonds and in turn causes the British pound (£) to O 10%; higher; supply; depriciate 7%; higher; demand; appreciate O 7%; higher; demand; depriciate 5%; lower; supply; appreciate than the global average, which againstarrow_forward5. Suppose after you graduate from Algoma University, you find a job that pays you $75,000 a year. Further suppose that you take out a home equity loan of $360,000 for 30 years at an annual interest rate of 3.5 percent, with payments to be made monthly. What will your monthly payments be? If the interest rate increases from 3.5 percent to 5.0 percent, how much will your monthly payments increase? Instead of 30 years, you decide to pay your loan in 25 years, what will your monthly payments be if the interest rate remains at 3.5 percent or increases to 5.0 percent. Develop a chart comparing these monthly payments. Show your work.arrow_forward
- Figure 10-6 Real interest rate 6% 5 4 3 2 1 0 30 Select one: O O O O 60 90 _____ 120 150 a. supply; rise; decreasing; increasing b. supply; fall; increasing; decreasing c. demand; fall; decreasing; decreasing d. demand; rise; increasing; decreasing 180 will Refer to Figure 10-6. The loanable funds market is in equilibrium, as shown in the figure above. As a result of an increase in the government budget deficit, the thereby the equilibrium real interest rate and the equilibrium quantity of loanable funds. S Quantity of loanable funds (millions of dollars) for loanable fundsarrow_forwardWhat is the present value of a payment of $5,000 at the end of one year and a second payment of $7,000 at the end of two years if the interest rate is 5 percent? O A. $11,201.84 O B. $11,111.11 O C. $10,985.14 O D. $12,250.32arrow_forwardSuppose that both Friedman and Fisher are absolutely correct. Assume that over many years money supply grows at the rate of 5 percent per year and the rate of growth of real GDP is 3 percent per year. Suppose also that the real interest rate during these years is 2 percent per year. If instead money supply grew at the rate of 7 percent per year, the real interest rate would equal: 1 percent per year O 2 percent per year 3 percent per year 4 percent per yeararrow_forward
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