MICROECONOMICS W/CONNECT ACCESS CODE
21st Edition
ISBN: 9781260720648
Author: McConnell
Publisher: MCG
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Chapter 18, Problem 2P
To determine
Market for the lonable funds.
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Suppose that the demand for loanable funds for car loans in the Milwaukee area is $10 million per month at an interest rate of 10 percent per year, $11 million at an interest rate of 9 percent per year, $12 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? If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be? What if the usury limit is raised to 7 percent per year?
Suppose that the demand for laonable funds for car in the Milwaukee area is $11million per month at an interest rate of 10 percent per year, $12million at an interest rate of 9 percent per year, $13million at an interest rate of 8 percent per year and so on. a. If the supply of loanable funds is fixed at $17million, what will be the equilibrium interest rate?
b. If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be?
c. How big will the monthly shortage for car loans be if the usury limit is raised to 7 percent per year?
Suppose that the interest rate at which Joanne can borrow and lend is 10 percent per year, but she can earn $22,000 with a high school degree. Her tuition and books at college cost $6,000 and her living expenses are $15,000 per year. Savings are deposited at the end of the year they are earned and receive (compound) interest at the end of each subsequent year. Similarly, the loans are taken out at the end of the year in which they are needed, and interest does not accrue until the end of the subsequent year. Now that the interest rate has risen, should Joanne go to college or go to work?
Chapter 18 Solutions
MICROECONOMICS W/CONNECT ACCESS CODE
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- In the graph you've just made, what happens if the real interest rate is 4 percent per year? A. The real interest rate rises to 8 percent per year, where there is a surplus of loanable funds. B. The real interest rate fluctuates between 4 and 8 percent per year. C. The real interest rate remains at 4 percent per year. D. There is a shortage of loanable funds and the real interest rate rises to 6 percent per year. Use screenshot attached below to answer the question thanks!arrow_forwardassume that as the economy booms, the demand for business and consumer loans rises significantly while the supply of funds and loans remains constant. As a result, the market interest rate for business and consumer loans rises to 20% per year. The government implements a ceiling on interest rates of 15% ab year and as a resultarrow_forwardChairman Latrobe, the Supreme Leader of Rolling Rock decided to increase the personal tax rate to fund the defense force. 8) How may this affect the loanable funds market? Explain by describing the change in the demand for, or the supply of, loanable funds. 9) Because of the change decreed by President Thug and your answer to question 8, what is likely to happen to the interest rate and the quantity of funds in the loanable funds market? 10) How will each of these Rolling Rockers feel about President Thug’s decision? (A) Investor Confidence (B) The President of Rolling Rock National Bankarrow_forward
- Suppose that the interest rate is 4 percent. What is the future value of $100 four years from now? How much of the future value is total interest? By how much would total interest be greater at a 6 percent interest rate than at a 4 percent interest rate?arrow_forwardScenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to Fall/Rise and the level of investment spending to decrease/Increase Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. Shift the appropriate curve on the graph to reflect this change. The implementation of the new tax credit causes the interest rate to Fall/Rise and the level of investment to Fall/Rise . Scenario 3: Initially, the government's budget is…arrow_forwardThe interest rate is 6 percent a year and you expect to receive $1,000 next year and the following year. What is the present value of $1,000 to be received next year? What is the present value of $1,000 tobe received in two years? The present value of $1,000 to be received next year is $ ____. >>>>Answer to 2 decimal places.arrow_forward
- Suppose the government changes the tax code, allowing individuals to reduce their taxable income if they save money in registered retirement savings plans (RRSPs). Your response should answer the following questions: State and explain which loanable funds curve would this policy affect? Which way would the loanable funds curve shift? What would be the impact on interest rates? Draw the loanable funds diagram to illustrate your answers for a to c.arrow_forwardSuppose that the interest rate is 5 percent. Enter your answers rounded to 2 decimal places. A. What is the future value of $100 four years from now? $ How much of the future value is total interest? $ b. By how much would total interest be greater at an interest rate of 7 percent than at an interest rate of 5 percent? $arrow_forwardElroy Harris is considering whether to buy a corn and soybean farm in Iowa. The farm will cost $800,000, and Xander will be able to pay this from profits his recently deceased mother made on the stock market and willed to him. He estimates that if he does not run the farm, and keeps his current job as an economic forecaster, he will be able to earn $40,000 a year. The prevailing interest rate is 9 percent. Xander’s only motive is to maximize his income. His accountant tells him the annual profit from the farm is likely to be depending on certain conditions and assuptions: Scenario i) $160,000 of accounting profit Scenario ii) $100,000 of accounting profit Scenario iii) $50,000 of accounting profit Using the concept of positive economic profit, which of the three scenarios would the economic opportunity cost justify him taking up farming and quitting his job as an economic forecast. Show your work and calculationsarrow_forward
- Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000.Here are the rates of return on the students' investment projects: Harry 5 percent Ron 8 percent Hermione 20 percent a. If borrowing and lending are prohibited, each student uses only personal savings to finance his or her own investment project, how much will each student have a year later when the project pays its return? b. 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? c. Among these three students, what would be the number of loanable funds supplied and quantity demanded at an interest rate of 7 percent? At 10 percent? d.At what interest rate would the loanable funds market among these three students be in equilibrium? At this interest rate,…arrow_forwardThe market interest rate is 9 percent and is expected to stay at that level. Consumers can borrow and lend all they want at this rate. Consider each of the following situations. 1) Would you prefer a $500 gift today or a $540 gift next year? 2) Would you prefer a $100 gift now or a $500 loan without interest for four years? 3) Would you prefer a $350 rebate on an $8000 car or one year of financing for the full price of the car at 0 percent interest?arrow_forward5. The market for loanable funds and government policy The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario. (Note: You will not be graded on any changes you make to the graph.) Scenario 1: Individual Retirement Accounts (IRAs) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is a decrease in the maximum contribution, from $5,000 to $3,000 per year. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to ______ (fall/ rise) and the level of investment spending to _____…arrow_forward
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