Simplified HW 6

Rand Capital, a financial industry conglomerate, pools together several hundred home mortgages and sells shares in them to groups of investors. However, many investors decide against this option because of the risk involved and the difficulty of assessing the quality of such a large number of individual mortgages. Rand Capital is

floating a loan-backed security

Collaboration with Congress during the Clinton Administration allowed for an aggressive deficit-cutting plan to pass. As a result, the government was able to reach a balanced budget at the end of the 90's. Move the supply and/or demand curves to describe the expected effect that this deficit-reduction likely had upon the loanable funds market. As a result, private investment should have

increased because the cost of borrowing decreased.

Caleb has developed a prototype garlic-peeling device that he hopes to sell to the public. He is having his startup issue securities that offer buyers the promise to pay a specified amount of interest each year plus the principal in five years. Caleb is

selling bonds

Lyle and Shane start a business selling pencil sharpeners to elementary schools. Their company becomes an instant success, and they decide to allow people to start buying small shares of their company. This gives individuals who buy shares the right to vote in company decisions and a small percentage of the profits. Lyle and Shane are

selling stock

Audrey wants to buy a new car but does not have enough cash. She gets funding from her local bank with the promise that she will make monthly payments for the next three years to repay the original amount lent to her plus 66% interest. Audrey is

taking out a 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. As a result of a stock market boom, individuals begin to feel richer and spend more while also saving less.

Shift in supply

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.

Shift in supply

Jack decides to build a chateau in the mountains of Colorado and operate it as a ski resort. He secures funding from a local commercial bank after discussing his business plan with the bank. He promises to pay back the principal plus interest over the next 20 years. Jack is

taking out a loan

Funds that are kept in a bank that must be relinquished upon the owner's request

Bank deposit

Why do funding from national savings and funding obtained from capital inflows differ?

Because national savings are repaid domestically, whereas capital inflows are repaid to a foreigner.

A promise to pay issued by a borrower with annual interest payments and a principal payment at maturity.

Bond

The difference between the amount the government collects and how much it spends

Budget balance

The result when the government spends more money than it takes in through taxes

Budget deficit

When the government spends less money than it takes in through taxes

Budget surplus

The net amount of funds coming into a country

Capital inflow

Which of the four graphs best demonstrates the Fisher effect? Which of these statements best summarizes the impact of the Fisher effect?

Consumers consider future inflation.

True or False: A trade balance in surplus increases the supply of financial capital.

False

True or False: An improvement in the budget balance increases the demand for financial capital.

False

True or False: If private savings is equal to private investment, then there is neither a budget surplus nor a budget deficit.

False

True or False: Lower interest rates can lead to private investment being crowded out.

False

True or False: National budget deficits are NOT included in the calculation of national savings.

False

True or False: Outflows of funds can only be generated by countries with a larger gross domestic product (GDP) per capita than the country receiving the funds.

False

Which of the terms acts as the "price" in the market for loanable funds?

Interest rate

There are two aspects of efficiency that the equilibrium of market for loanable funds exhibits. Select the TWO statements that characterize these two aspects of efficiency.

Investment projects that are financed by savers have larger rates of return than projects that do not receive financing. Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.

Select the statement that describes the fundamental relationship between savings and investment spending.

Investment spending and savings are always equal.

An agreement between a lender and a borrower

Loan

When the preceding term is combined with all of the privately‑held savings from across the country

National savings

As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase.

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

Quantity supplied will increase.

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. 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.

Shift in demand

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. 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.

Shift in demand

A share of ownership in a company

Stock

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?

The business will not take out the loan.

Adjust the graph to show how an increase of $25.8 billion dollars in the government's budget deficit affects this loanable funds market, holding all else equal. Select the answer that describes the adjustment in the loanable funds market.

The deficit increases the demand for loanable funds and shifts the demand curve to the right, increasing the interest rate and crowding out investment spending.

True or False: An increase in government spending can crowd out private investment.

True

True or False: An increase in private consumption may crowd out private investment.

True

True or False: The budget balance can be either positive or negative.

True

True or False: The national savings are the combined value of all private savings and the budget balance.

True

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

Which of the following best defines a financial intermediary?

a financial institution that transforms investor funds into financial assets

The accompanying graph represents the market for loanable funds in the hypothetical country of Bunko. Assume the market is initially in equilibrium and inflation expectations are 2%. a. Adjust the graph to demonstrate the effects of inflation expectations increasing from 2% to 4%. b. What is the real interest rate after the change in inflation expectations? c. Which effect below characterizes the relationship between inflation expectations and nominal interest rates?

a. Calculate expected inflation. Expected inflation is 2% (= 4%-2%). Thus, supply of loanable funds reduces since real interest rate declines. Supply curve shifts leftward. The demand for loanable funds increases because higher inflation expectations means more price in the market. Thus, demand curve shifts leftward. b. 3% c. The Fisher effect

After reading the given descriptions, please place the correct label by the quadrant on the graph that best describes each person's position in the market for loanable funds. Jolien decides not to take out a loan to fund expanding her grocery store because she projects it will only earn a return of 4%. Osi closely follows the market for United States Treasury Bonds. He is willing to invest in them anytime the rate of return is 5% or higher, and sees that this is the case. In order to open a new car wash facility expected to return 13%, Julius secures a loan. John will shift his stock investments to corporate bonds when they return at least 10%. They do not, so he stays with stocks

In this case, Jolien demands a loan. The amount she demands will earn a lower interest rate at the market. Therefore, the lower portion of the demand curve is for Jolien. Osi wants to invest and hence is a supplier of loanable funds. he will supply the loan at an interest rate of 5% or higher. Osi is at the lower half of the supply curve. Similarly, Julius, demands a loan, and as he gets a higher return on the loan amount he stays at the upper portion of the demand curve. Lastly, John supplies loanable funds and expects a return higher than equilibrium. Thus, John is at the upper portion of the supply curve.

In a small, closed economy, national income (GDP) is $400.00 million for the current month. Individuals have spent $150.00 million on the consumption of goods and services. They have paid a total of $200.00 million in taxes, and the government has spent $150.00 million on goods and services this month. Use this information and the national income identity to answer the questions. How much is spent on investment in this economy? What is national saving in this economy? How are investment and national saving related in an economy like this?

Investment: $100 million I=GDP−C−G=$400.00 million−$150.00 million−$150.00 million=$100.00 millionI=GDP−C−G=$400.00 million−$150.00 million−$150.00 million=$100.00 million Savings: $100 million S=GDP−C−GS=GDP−C−G S=I National saving equals investment.