Subpart (a):
The Investment and the loanable fund market of the economy.
Subpart (a):
Explanation of Solution
Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.
When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:
Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:
Thus, Ron will have $1,080 after one year.
Thus, Hermione will have $1,200 after one year.
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
Subpart (b):
The Investment and the loanable fund market of the economy.
Subpart (b):
Explanation of Solution
When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
Subpart (c):
The Investment and the loanable fund market of the economy.
Subpart (c):
Explanation of Solution
When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the
When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
Subpart (d):
The Investment and the loanable fund market of the economy.
Subpart (d):
Explanation of Solution
The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
Subpart (e):
The Investment and the loanable fund market of the economy.
Subpart (e):
Explanation of Solution
When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:
Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:
Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.
Concept introduction:
Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.
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Chapter 8 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
- In the late 1990s, the U.S. government moved from a budget deficit to a budget surplus and the trade deficit in the U.S. economy grew substantially. Using the national saving and investment identity, what can you say about the direction in which saving on/or investment must have changed in this economy?arrow_forwardSuppose 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?arrow_forwardAs the interest rate increases, the opportunity cost of _____. a. borrowing decreases b. past consumption decreases c. current consumption increases d. saving increases e. saving decreasesarrow_forward
- Give at least three examples of how savings can be channeled into productive investment. Why is investment so important for an economy? What do you sacrifice when you save today?arrow_forwardThree students have each saved $1,000.each has an investment opportunity in which he or she can invest upto $2,000.Here are the rates of return on the students investment project:a.If borrowing and lendind are prohibited,so each student uses 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?b.Now suppose their school opens up a market for loanable funds in which students ran 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 quantity of loanable funds supplied and quantity demanded at an interest rate of 7 percent?At 10percent?d.At what interest rate would the loanable funds market among these three students be in equilibrium?At this interest rate,which student(s) would borrow and which student(s) would lend?e.At the equilibrium interest rate,how…arrow_forwardConsider an economy described by the following equations: Y = C + I + G AND, Y = 5,000; G = 1,000; T = 1,000; C = 250 + 0.75(Y − T); I = 1,000 − 50 r. a. In this economy, compute private saving, public saving, national saving and the equilibrium interest rate. b. If G rises to 1,250, Compute private saving, public saving, and national saving and the new equilibrium interest rate.arrow_forward
- For each of the following pairs, which bond wouldyou expect to pay a higher interest rate? Explain.a. a bond of the U.S. government or a bond of anEastern European governmentb. a bond that repays the principal in year 2020 or abond that repays the principal in year 2040c. a bond from Coca-Cola or a bond from a softwarecompany you run in your garaged. a bond issued by the federal government or abond issued by New York Statearrow_forwardSuppose the government of Australia incurs a budget deficit of $50 billion due to increased government spending in 2020 as result of Covid 19. Because of this, the government borrowing in 2021 increases by the same amount. a. Show this development using a graph representing the market for loanable funds for Australia. Explain in writing and using a graph the effect of this on interest rates. b. Compare the size of equilibrium changes in 1) investment, 2) public saving, 3) private saving and 4) national saving (public saving + private saving) with $50 billion increase in borrowing. Compare the changes (increase/decrease) in these variables indicating same, less or more than the $50 billion. c. Will the equilibrium quantity of national savings change by more or less than the initial change in public saving? Explain your answer (in 50 words…arrow_forwardFor 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_forward
- Consider the market for loanable fund. Suppose that government started to give tax incentives for investment (so the cost of investment fell.) Answer which curve (Demand or Supply) would shift to which direction (Left or Right), and answer how the equilibrium saving would change (Decrease or Increase)Curve: Direction: Saving:arrow_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
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