EBK PRINCIPLES OF MACROECONOMICS
12th Edition
ISBN: 8220101472298
Author: Oster
Publisher: PEARSON
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Chapter 8, Problem 3.1P
To determine
To understand how the planned investment is affected by the interest rate.
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Explain how changes in interest rates and rates of return on various investment options will affect the amount of money that businesses are willing to invest to increase output.
Explain two of the channels through which lower interest rates stimulate consumption by households.
Which of the following situations represent investment or saving? Explain.
Your family takes out a mortgage and buys a new house.
You use your $200 paycheck to buy stock in AT&T.
Your roommate earns $100 and deposits it in his account at a bank.
You borrow $1,000 from a bank to buy a car to use in your pizza delivery business.
For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain.
A bond that repays the principal in year 2030 or a bond that repays the principal in year 2040. 2 . A bond from Coca-Cola or a bond from a software company you run in your garage.
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- Suppose that the government creates a disincentive for private saving by increasing the tax that people pay on income from holding stocks and bonds. Construct a well-labeled diagram that depicts the effect of the policy change on the real interest rate and the equilibrium quantity of investment.arrow_forwardWhen economists say “investment,” they are referring to financial investments, which are purely financial transactions, such as swapping cash for a stock or a bond. Select one: a. True b. Falsearrow_forwardResponding to the economic conditions in the United Kingdom in 1932, Friedrich Hayek and his colleagues believed that it was important to boost aggregate demand, because doing so would reduce private savings. It was important to reduce private saving, because doing so would boost aggregate demand It was perilous to weaken private saving, because doing so might reduce government spending. it was perilous to weaken private saving, because doing so might reduce productive investment. Type the correct answer ASAP with proper explanation of the each option given. Thank youarrow_forward
- ) A college is considering investing $6 million to add 10,000 seats to its football stadium. The athletic department forecasts it can sell all these extra seats at each game for a ticket price of $20 per seat, and the team plays six home games per year. If the school can borrow at an interest rate of 14%, should the school undertake this project? (Show your math!) What would happen if the school expected a losing season and could sell tickets for only 5,000 of the seats?arrow_forwardIf business taxes are reduced and the real interest rate increases: * A. consumption and saving will necessarily increase. B. the level of investment spending might either increase or decrease. C. the level of investment spending will necessarily increase D. the level of investment spending will necessarily decreasearrow_forwardPlease answer part 4 only Suppose a government decides to pass a tax cut, while keeping the level of government spending the same. How can the government finance the tax cut? What is the impact of the tax cut on public saving? Will private saving be affected and, if so, how? If households save most of (but not all) the tax cut, how will this affect investment? How will this affect the equilibrium interest rate? and why?arrow_forward
- 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,…arrow_forwardEconomists 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 – 100 r, where r is the country’s real interest rate, expressed as a percentage. Calculate private saving?arrow_forwardAssume that in this economy consumption (C) is given by the equation C = 600 + 0.6(Y – T). Investment (I) is given by the equation I = 2,000 – 100r, where r is the real rate of interest in percent terms. Taxes (T) are 500 and government spending (G) is also 500. What are the values of private saving, public saving, and national saving?arrow_forward
- 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 Statearrow_forwardHow does a decrease in interest rates typically affect consumer spending and investment? A. Consumer spending decreases, investment increases B. Consumer spending increases, investment decreases C. Both consumer spending and investment increase D. Both consumer spending and investment decreasearrow_forwardEconomists 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 – 100 r, where r is the country’s real interest rate, expressed as a percentage. Calculate private savings?arrow_forward
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