ECON104 Macroeconomic Analysis (Homework Ch 13)

ECON104 Macroeconomic Analysis (Homework Ch 13)
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  1. Financial institutions in the U.S. economy

Suppose Darnell would like to use $2,000 of his savings to make a financial investment.

One way of making a financial investment is to purchase stock or bonds from a private company.

Suppose NanoSpeck, a biotechnology firm, is selling bonds to raise money for a new lab—a practice known as ______ finance. Buying a bond issued by NanoSpeck would give Darnell _____ the firm. In the event that NanoSpeck runs into financial difficulty, _______ will be paid first.

Suppose instead Darnell decides to buy 100 shares of NanoSpeck stock.

Which of the following statements are correct? Check all that apply.

  • NanoSpeck earns revenue when Darnell purchases 100 shares, even if he purchases them from an existing shareholder.
  • The Dow Jones Industrial Average is an example of a stock exchange where he can purchase NanoSpeck stock.
  • Expectations of a recession that will reduce economy-wide corporate profits will likely cause the value of Darnell’s shares to decline.

Alternatively, Darnell could make a financial investment by purchasing bonds issued by the U.S. government.

Assuming that everything else is equal, a corporate bond issued by an electronics manufacturer most likely pays a ______ interest rate than a municipal bond issued by a state.

 

  1. Saving and investment in the national income accounts

The following table contains data for a hypothetical closed economy that uses the dollar as its currency.

 Suppose GDP in this country is $1,540 million. Enter the amount for government purchases.

National Income AccountValue
(Millions of dollars)
Government Purchases (GG)
Taxes minus Transfer Payments (TT)455
Consumption (CC)700
Investment (II)490

Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table.

National Saving (S)National Saving (S) =  = _______   
 =  = 

   

million

Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table.

Private SavingPrivate Saving =  =_______   
 =  =million
Public SavingPublic Saving =  =______   
 =  =million

Based on your calculations, the government is running a budget _______.

 

  1. The meaning of saving and investment

Classify each of the following based on the macroeconomic definitions of saving and investment.

SavingInvestment
Yakov takes out a mortgage for a new home in Detroit.
Rajiv purchases a certificate of deposit at his bank.
Ana purchases stock in NanoSpeck, a biotech firm.
Simone borrows money to build a new lab for her engineering firm.

  1. Supply and demand for loanable funds

The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds.

______ is the source of the supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied    .

Suppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied is ____ than the quantity of loans demanded, resulting in a ____ of loanable funds. This would encourage lenders to ____ the interest rates they charge, thereby _____ the quantity of loanable funds supplied and ____ the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of ____%.

  1. 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: 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 a decrease in the tax rate on interest income, from 20% to 15%.

Shift the appropriate curve on the graph to reflect this change.

This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to ____ and the level of investment spending to ____.

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 repeals a previously existing investment tax credit.

Shift the appropriate curve on the graph to reflect this change.

The repeal of the previously existing tax credit causes the interest rate to ____ and the level of investment to ____.

Scenario 3: Initially, the government’s budget is balanced; then the government responds to the conclusion of a war by significantly reducing defense spending without changing taxes.

This change in spending causes the government to run a budget ____, which ____ national saving.

Shift the appropriate curve on the graph to reflect this change.

This causes the interest rate to _____ , _____ the level of investment spending.

 

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