HW9

There were many causes that contributed to the financial crisis of 2007-2008. Which of the choices most accurately describes the role of securitization in contributing to the crisis?

Banks bundled mortgages together and then sold them on the market as a financial asset. However, the risk level of these securitized assets was often much higher than the purchaser thought.

Identify an example of consumption smoothing

all of these are examples of consumption smoothing

The source of the _______ for loanable funds is investment.

demand

The _____ represents the price of a loan/

interest rate

Which of the following best defines a financial intermediary?

A financial institution that transforms investor funds into financial assets

Please use the graph to answer the questions. Given the market conditions, what will the prevailing interest rate be? Given the market conditions, how much will be available in loanable funds?

10% $50 billion

Suppose the Chief Financial Officer (CFO) of a company is interested in raising funds for a major investment by issuing bonds of varying maturity to investors. One of the longer-term bonds being issued can be purchased for $95,000.00 per bond and pays $8,360.00 annually to the investor. What is the annual interest rate on this bond?

8,360 / 95,000= 0.088 0.088 * 100 = 8.8%

What is crowding out? ______ are a mechanism by which crowding out occurs.

A reduction in consumption and investment spending that results from government borrowing Increases in interest rates

John has to decide whether to buy a zero-coupon bond with very little risk that costs $950 and will pay $1070 in one year or put his money in a savings account with an annual interest rate of 12%. Compute the difference in the rate of return of the two investments. Round your answer to one decimal place. Which of the two investments will John prefer?

1070/ 950 =1.1263 1.1263 - 1 = 0.1263 0.1263* 100 = 12.6 12.6 - 12 = 0.6 0.6% the zero-coupon bond

Classify each of the given events according to the category that best describes how it affects the equilibrium interest rate in the market for loanable funds. Increases the interest rate: Decreases the interest rate:

Increase: an increase in large investments, an investment tax credit Decrease: an increase in savings, a decrease in investor optimism

Which of the situations is an example of the crowding-out effect on investment as it pertains to macroeconomics?

Jack wants to borrow money to create a cowboy-themed inflatable bounce house for kids called "Wild Wild West." However, the government is running a deficit which has increased interest rates so much that Jack can no longer afford to borrow the money.

The shadow banking system refers to

nonbank financial firms that act as banks by borrowing and lending in an effort to make a profit

The source of the _______ for loanable funds is saving.

supply

Select the definition of consumption smoothing

borrowing in periods of low income and saving in periods of high income to make consumption less variable than income

Suppose that the government changes the tax code to allow additional amounts of money to be placed in 401(k) retirement accounts, increasing the extent to which people can delay their tax obligations. Show the effect by shifting the appropriate curve in the market for loanable funds. What are the new equilibrium real interest rate and the quantity of loanable funds?

Shift the supply curve to the right Demand curve stays where it is Real interest rate: 2% Loanable funds: $120 million

Brian has grown tired of paying rent each month to his landlord and has decided to purchase a condo. Brian has been saving money and has $21.00 that he will use as a down payment on this condo. He will take out a mortgage to pay the remaining price. Brian finds a suitable condo and negotiates a price of $350.00. Assume that there are no extra fees associated with purchasing the condo. Upon moving in, how much equity does Brian have in this condo? What is Brian's leverage ratio associated with this condo when he moves in?

$21.00 350-21= 329 329/21= 15.67

Suppose that the government changes the tax code to allow additional amounts of money to be placed in 401k retirement accounts, increasing the extent to which people can delay their tax obligation (effectively, this is a tax cut on retirement savings). Show the effect by shifting the appropriate curve in the market for savings. According to this model, what is the result?

Private investment would increase as the cost of borrowing decreased Shift the supply curve to the right Demand curves stays where it is

Please answer the given four questions related to the market for loanable funds. What effect will an increase in interest rates have on the quantity of loanable funds supplied? As interest rate decreases, what happens to the quantity of loanable funds demanded? Which of the terms acts as the "price" in the market for loanable funds? If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

Quantity supplied will increase Quantity demanded will increase Interest rate The business will not take out the loan

Please decide whether each of the scenarios related to the loanable funds market will result in a shift in supply or a shift in demand. China decides to reduce its capital investment in the United States, as it expects low returns due to a weak U.S. economy. Calopolis, a college town in Northern California, has for many years banned the presence of fast food restaurants in city limits. As of 2012, however, the city will allow several fast food companies to open franchised locations. Due to an increase in revenues after a tax hike, the United States is able to eliminate the deficit and begins to maintain a balanced budget for the first time in several decades. As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less.

Shift in supply Shift in demand Shift in demand Shift in supply

Suppose that the government is concerned with the unemployment rate and, as a response, offers a tax credit to any firm that builds a new factory in the United States. Show the effect of this policy on the market for loanable funds by shifting the appropriate curve in the graph.

Shift the demand curve to the right Supply curve stays where it is

Please use the graph to answer the given questions. Assume the people act rationally. Which of the statements best describes a situation represented by point A? Given the market conditions, what will be the prevailing interest rate? Given the market conditions, how much will be available in loanable funds?

Wayne projects that if he takes out a loan to open another gym franchise, he will earn a lower return than the interest rate he would have to pay, so he decides against it. 10% $50 billion

Consistent with the pattern predicted by the lifecycle theory of savings, the corresponding graph shows how income and consumption vary as a hypothetical person ages. Use this graph to answer the questions. At which age listed on the graph does this person begin saving? saving age: At what age listed on the graph does this person retire completely? retirement age: At age 70, this person in: According to the graph, which is most likely to have occurred at age 45?

23 years old 70 years old dissaving a pay raise