Principles of Macroeconomics
Describe a change in the tax code that might increase private saving. If this policy were implemented, how would it affect the market for loanable funds?
A change in the tax code that might increase private saving is the expansion of eligibility for special accounts that allow people to shelter some of their saving from taxation.This would increase the supply of loanable funds, lower interest rates, and increase investment.
What is a government budget deficit? How doesit affect interest rates, investment, and economicgrowth?
A government budget deficit arises when the government spends more than it receives in tax revenue.Because a government budget deficit reduces national saving, it raises interest rates, reduces private investment, and thus reduces economic growth.
name and describe two financial intermediates
are banks and mutual funds. Banks take in deposits from people who want to save to make loans to people who want to borrow.
name and describe two markets that are part of the financial system in the US economy
are the bond and stock market. Bonds are certificates of indebtedness, whereas stocks are partial ownerships of a firm. Two financial intermediaries are banks and mutual funds
Three students have each saved $1000. Each has an investment opportunity in which he or she can invest up to $2000. Here are the rates of return on the students' investment projects:Harry 5%Ron 8%Hermione 20%If borrowing and lending 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?
Harry $1050Ron $1080Hermione $1200
If the expected rate of return is greater than r, the student would borrow. If the expected rate of return is less than r, the student would lend. Three students have each saved $1000. Each has an investment opportunity in which he or she can invest up to $2000. Here are the rates of return on the students' investment projects:Harry 5%Ron 8%Hermione 20%Among these three students, what would be the quantity of loanable funds supplied and quantity demanded at interest rate of 7%? At 10%?
If r=7% then Ron and Hermione would demand loanable funds and Harry would supply loanable funds.If r=10% then Hermione would demand loanable funds and Ron and Harry would supply loanable funds.
Three students have each saved $1000. Each has an investment opportunity in which he or she can invest up to $2000. Here are the rates of return on the students' investment projects:Harry 5%Ron 8%Hermione 20%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 a lender in this market?
If the expected rate of return is greater than r, the student would borrow. If the expected rate of return is less than r, the student would lend.
What is investment? How is it related tonational saving?
Investment refers to the purchase of new capital, such as equipment or buildings.It is equal to national saving. S = I
If the business community becomes more optimistic about the profitability of capital, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________.
demand, upThe more profitable capital becomes, the more firms are rewarded for borrowing money to invest in new capital. Thus if capital is perceived as more profitable, the demand for loanable funds would shift to the right, driving the equilibrium interest rate up.
Consumption expenditures are defined as spending on goods and services by
household
Which of the following is included in Germany's GDP?i. BMWs produced in a German owned factory in USii. the value of the stocks sold on the German stock ex, the Frankfurt Stock Exiii. china produced by the English owned Wedgewood Company at a factory in Berlin, Germany
iii. china produced by the English owned Wedgewood Company at a factory in Berlin, Germany
From 2008 to 2012, the ratio of government debt to GDP in the United States
increased markedlyAs the economy was experiencing a financial crisis and deep recession in 2008, the debt-to-GDP ratio in the United States increased markedly.
why is important for people who own stocks and bond to diversity their holdings? what types of of financial institutions makes diversification easier
is important for people who own stocks and bonds to diversify their holdings because then they will have only a small stake in each asset, which reduces risk. Mutual funds make such diversification easy by allowing a small investor to purchase parts of hundreds of different stocks and bonds.
example of final good or service
new economics book we're using
If a popular TV show on personal finance convinces more Americans about the importance of saving for retirement, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________.
supply, downThe equilibrium interest rate is determined by the intersection of the supply and demand curves in the market for loanable funds.Saving makes up the supply of loanable funds; therefore, an increase in saving shifts the supply curve for loanable funds to the right. This drives the equilibrium interest rate down.
when measuring GDP the
the expenditures on goods and services by all levels of government are included.
Net exports of goods and services is defined as equal to
the value of exports of goods and services minus the value of imports of goods and services
A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving?
$300In a closed economy (that is, an economy that does not trade with the rest of the world), saving must be equal to investment, S=I .Saving can be broken down into the income that is left after subtracting consumption and government spending, or Y-C-G . Private saving is equal to income minus consumption and taxes, with public saving equal to taxes minus government spending; therefore, total saving can be rewritten as (Y-C-T) + (T-G) . To solve for private saving, set total saving equal to investment, and substitute the value of public saving:S=IY-C-G = 250(Y-C-T) + (T-G) = 250Private saving + (150-200) = 250Private saving + (-50) = 250Private saving = 300
Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public saving is $0.2 trillion. Assuming the economy is closed, complete the following table by calculating consumption, government purchases, national saving, and investment.
(In trillions of dollars)- Consumption: 6- Government Purchases: 1.3- National Saving: 0.7- Investment: 0.7
Economists in Funlandia, which has a closed economy, have collected the following information about the economy for a particular year:Y=10000, C=6000, T=1500, G=1700The economists also estimate that the investment function is (where r is the country's real interest rate, expressed as a percentage):I=3300-100rComplete the following table by calculating private saving, public saving, national saving, investment, and the equilibrium real interest rate.
- Private Saving: 2500- Public Saving: -200- National Saving: 2300- Investment: 2300- Equilibrium Real Interest Rate: 10%
Which of the following is included as investment in GDP?i. cars produced during the year but unsold at the end of the yearii. new capital equipment produced and purchased during the yeariii. purchases of a company's stocks and bonds
. cars produced during the year but unsold at the end of the yearii. new capital equipment produced and purchased during the year
Nina wants to buy and operate an ice cream truck but doesn't have the financial resources to start the business. She borrows $5,000 from her friend Max, to whom she promises an interest rate of 7 percent, and gets another $10,000 from her friend David, to whom she promises a third of her profits.What best describes this situation?
David is a stockholder, and Max is a bondholder.Stockholders share in the profits of a corporation, offering both higher risk and potentially higher reward than bonds.Bondholders, on the other hand, receive a fixed interest payment, regardless of the company's profitability.
What is national saving? What is privatesaving? What is public saving? How are thesethree variables related?
National saving is the amount of a nation's income that is not spent on consumption or government purchases.Private saving is the amount of income that households have left after paying their taxes and paying for their consumption. Public saving is the amount of tax revenue that the government has left after paying for its spending. The three variables are related because national saving equals private saving plus public saving.S = (Y-T-C) + (T-G) => National Saving = Private Saving + Public Saving
. Which one, real GDP per capita or nominal GDP per capita, is more appropriate to make cross-country comparison of income levels? Briefly explain
Nominal GDP per capita is more appropriate to make cross-country comparison of income levels. Real GDP is calculated on the basis of the price levels in the 5/5 base year(s), so is real GDP per capita. But countries may choose different years as their own base years, which make current real GDP per capita of different countries become incomparable. In addition, when we make cross-country comparison, we usually have to convert GDP per capita expressed by various currencies into the same currency, such as U.S. dollar. During this process, exchange rates will be employed which is relative purchasing power of one currency to another under current price levels of two countries. Therefore, GDP per capita should also be expressed and calculated by using current price levels.
28. Which one, real GDP or nominal GDP, is more appropriate to calculate thegrowth of total output? Briefly explain.
Real GDP is more appropriate to calculate the growth of total output. The reason is that the change in real GDP between two years only reflects the change in quantity of goods and services whereas the change in nominal GDP between two years reflects both the change in quantity of goods and services and the change in price levels. For example, if real GDP grows at 2%, it results certainly from a 2% increase in quantity of goods and services. However, if nominal GDP grows at 2%, we have no idea about how much of it comes from an increase in quantity of goods and services and how much comes from a rising price level.
Answer the following questions on asymmetric information[c] On the basis of the theories of information economics, why does Fiat, the automaker, spend a lot of money inviting George Clooney to show up in its TVcommercial?
The TV commercial is a typical example of signaling. Fiat, as the informed party, knows much more about its cars than potential customers, as the uninformed party, do. If Fiat just wants potential customers to know the company put a new model on the market, it might not be unnecessary to spend a lot of money inviting George Clooney to shoot the commercial. Of course, Clooney will attract more public attention to this commercial. But Clooney is also a signal Fiat sends out on the market. The signal is that the company with plenty of financial resources to invite Clooney is more likely to make a better, fancier car than its competitors do.
Suppose society decided to reduce consumption and increase investment. What groups in society would benefit from this change? What groups might be hurt?
The change would benefit many people in society who would have higher incomes as the result of faster economic growth. However there might be a transition period in which workers and owners in consumption good industries would get lower incomes and workers and owners in investment good industries would get higher income.
A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP?
The contribution to GDP is $3, the market value of the bread, which is the final good that is sold. The $2 wheat is an intermediate good and its market value has been included into the market value of the bread. To avoid double counting the value of intermediate goods, a government only collects the market values of final goods.
27. Many years ago, Peggy paid $500 to put together a record collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?
The sale of used records does not affect GDP at all because it involves no current production.
Answer the following questions on asymmetric information:[a] In an issue associated with asymmetric information, who are the two parties? How are the two parties defined?
The two parties are the informed (or more informed) party and the uninformed (or less informed) party. On a market, the informed party is defined as the one who has more or better information about the good/service transacted and the uninformed party is the one who has less or worse information about it.
What geographically is similar between GB and Japan that would affect the trade of the countries? How does this affect the longterm economic growth of the countries?
They are both island countries whose economies have access to the sea which gives them the advantage in international trade as sea shipping is the most economical way of trade. Also both countries are close to the huge markets of continents. They were exposed to new ideas and tech which are driving forces of long run economic growth.
What is the role of the financial system?
Transfer resources from savers to borrowers, increases economic efficiency
If the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income, then
private saving is negative, but public saving is positive.Private saving is the amount of income households have left after paying their taxes and paying for their consumption, or Y-T-C.Public saving is the amount of tax revenue that the government has left after paying for its spending, T-G .When consumption is greater than after-tax income ( C > Y-T ), private saving is negative;when the government collects more in taxes than it spends ( T>G ), public saving is positive.
Suppose society decided to reduce consumption and increase investment. How would this change affect economic growth?
reduce consumption and increase investment. How would this change affect economic growth? When investment increases, the stock of capital rises and thus each worker will be equipped with more machines, equipments, and tools. When each worker becomes more productive, total output will grow faster than before.
