savings and investments

Your company has a project that will provide $1,000 of revenue today and $2,000 of revenue one year from today. The relevant rate of interest is r. The present value of this project is

$1,000 + $2,000/(1 + r).

Your eccentric Uncle has promised to give you $50,000 when you graduate. You think that you will graduate in three years and could get about 7 percent on any money you saved. What is the present value of the $50,000?

$50,000/(1.07)3

Suppose that in a closed economy GDP is equal to 8,000, Taxes are equal to 2,000, Consumption equals 5,000, and Government expenditures equal 1,000. What is national saving

2000

Suppose the government institutes an investment tax credit. What would happen in the market for loanable funds?

The interest rate and the quantity of saving would rise. The interest rate and investment would rise.

What would happen in the market for loanable funds if the government were to decrease the tax on interest income?

There would be an increase in the amount of loanable funds borrowed.

represents the GDP in a closed economy?

Y = C + I + G

The identity that shows that GDP is both total income and total expenditure is represented by

Y = C + I + G + NX.

The source of the supply of loanable funds

is saving and the source of demand for loanable funds is investment.

The fall in investment due to government borrowing is called

crowding out

If a government went from a deficit to a surplus, government

debt would fall, the supply of loanable funds would shift right, and interest rates would fall.

When the government runs a budget deficit,

interest rates are higher than otherwise. national saving is lower than otherwise. investment is lower than otherwise.

In a closed economy, national saving equals

investment. income minus the sum of consumption and government expenditures. private saving plus public saving.

The slope of the demand for loanable funds curve represents the

negative relation between the real interest rate and investment.

The slope of the supply of loanable funds curve represents the

positive relation between the real interest rate and saving.

In a closed economy, what does (Y - T - C) represent?

private saving

In a closed economy, what does (T - G) represent?

public saving

If the tax revenue of the federal government exceeds spending, then the government

runs a budget surplus.

A higher interest rate induces people to

save more, so the supply of loanable funds slopes upward

An increase in the budget deficit

shifts the supply of loanable funds left. reduces public saving and so shifts the supply of loanable funds left. drives the price of loanable funds higher.

What would happen in the market for loanable funds if the government were to increase the tax on interest income?

the supply of loanable funds would shift left