ECON 214 HW13 Saving and Investment Assignment solutions complete answers

ECON 214 HW13 Saving and Investment Assignment solutions complete answers

 

1. Financial institutions in the U.S. economy

Suppose Edu decides to use $1,000 currently held as savings to make a financial investment.

One method of making a financial investment is the purchase of stock or bonds from a private company.

Suppose Bayzer, a pharmaceutical firm, is selling stocks to raise money for a new lab. This practice is called  finance. Buying a share of Bayzer stock would give Edu the firm. In the event that Bayzer runs into financial difficulty, will be paid first.

 

 

Suppose Edu chooses to buy 250 shares of Bayzer stock.

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

 Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Edu's shares to decline.

 The price of his shares will rise if Bayzer issues additional shares of stock.

 The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Bayzer stock.

 

Alternatively, Edu could undertake their financial investment by purchasing bonds issued by the government of Japan.

Assuming that everything else is equal, a bond issued by a government that is engaged in a civil war most likely pays a interest rate than a bond issued by the government of Japan.

 

Suppose Edu decides to use $4,500 currently held as savings to make a financial investment.

One method of making a financial investment is the purchase of stock or bonds from a private company.

Suppose Bayzer, a pharmaceutical firm, is selling bonds to raise money for a new lab. This practice is called     finance. Buying a bond issued by Bayzer would give Edu    the firm. In the event that Bayzer runs into financial difficulty,    will be paid first.

Suppose instead Edu chooses to buy 250 shares of Bayzer stock.

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

 An increase in the perceived profitability of Bayzer will likely cause the value of Edu's shares to rise.

 The price of his shares will rise if Bayzer issues additional shares of stock.

 Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Edu's shares to decline.

Alternatively, Edu could undertake their 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.

 

Suppose Jaylan decides to use $1,000 currently held as savings to make a financial investment.

One method of making a financial investment is the purchase of stock or bonds from a private company.

Suppose Arcadia, a biomedical research firm, is selling stocks to raise money for a new lab. This practice is called     finance. Buying a share of Arcadia stock would give Jaylan    the firm. In the event that Arcadia runs into financial difficulty,    will be paid first.

Suppose Jaylan chooses to buy 250 shares of Arcadia stock.

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

 The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Arcadia stock.

 The price of his shares will rise if Arcadia issues additional shares of stock.

 Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Jaylan's shares to decline.

Alternatively, Jaylan could undertake their financial investment by purchasing bonds issued by the U.S. government.

Assuming that everything else is equal, a U.S. government bond that matures 10 years from now most likely pays a     interest rate than a U.S. government bond that matures 30 years from now.

 

Suppose Osvaldo decides to use $9,000 currently held as savings to make a financial investment.

One method of making a financial investment is the purchase of stock or bonds from a private company.

Suppose Warm Breeze, a cloud computing firm, is selling stocks to raise money for a new lab. This practice is called     finance. Buying a share of Warm Breeze stock would give Osvaldo    the firm. In the event that Warm Breeze runs into financial difficulty,    will be paid first.

Suppose Osvaldo chooses to buy 250 shares of Warm Breeze stock.

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

 An increase in the perceived profitability of Warm Breeze will likely cause the value of Osvaldo's shares to rise.

 Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Osvaldo's shares to decline.

 The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Warm Breeze stock.

Alternatively, Osvaldo could undertake their financial investment by purchasing bonds issued by the government of Japan.

Assuming that everything else is equal, a bond issued by the government of Japan most likely pays a     interest rate than a bond issued by a government that is engaged in a civil war.

 

Suppose Osvaldo decides to use $9,000 currently held as savings to make a financial investment.

One method of making a financial investment is the purchase of stock or bonds from a private company.

Suppose Warm Breeze, a cloud computing firm, is selling stocks to raise money for a new lab. This practice is called     finance. Buying a share of Warm Breeze stock would give Osvaldo    the firm. In the event that Warm Breeze runs into financial difficulty,    will be paid first.

Suppose Osvaldo chooses to buy 250 shares of Warm Breeze stock.

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

 An increase in the perceived profitability of Warm Breeze will likely cause the value of Osvaldo's shares to rise.

 Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Osvaldo's shares to decline.

 The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Warm Breeze stock.

Alternatively, Osvaldo could undertake their financial investment by purchasing bonds issued by the government of Japan.

Assuming that everything else is equal, a bond issued by the government of Japan most likely pays a     interest rate than a bond issued by a government that is engaged in a civil war.

 

2. 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 $900 million. Enter the amount for investment.

National Income Account
Value
(Millions of dollars)
Government Purchases (G�)
250
Taxes minus Transfer Payments (T�)
325
Consumption (C�)
375
Investment (I�)
 
 

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 (�)
 =  = 
 
 =  = 
 
 
 

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
 =  = 
 
 =  = 
 
 =  = 
 

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

 

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

 Suppose GDP in this country is $660 million. Enter the amount for government purchases.

National Income Account
Value
(Millions of dollars)
Government Purchases (G�)
 
Taxes minus Transfer Payments (T�)
195
Consumption (C�)
300
Investment (I�)
210
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 (�)
 =  = 
    
 
 =  = 
    
 
 
 

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    .

 

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

 Suppose GDP in this country is $1,120 million. Enter the amount for consumption.

National Income Account
Value
(Millions of dollars)
Government Purchases (G�)
350
Taxes minus Transfer Payments (T�)
420
Consumption (C�)
 
Investment (I�)
245
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 (�)
 =  = 
    
 
 =  = 
    
 
 
 

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    .

 

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

 Suppose GDP in this country is $1,110 million. Enter the amount for investment.

National Income Account
Value
(Millions of dollars)
Government Purchases (G�)
300
Taxes minus Transfer Payments (T�)
240
Consumption (C�)
600
Investment (I�)
 
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 (�)
 =  = 
    
 
 =  = 
    
 
 
 

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    .

 

3. The meaning of saving and investment

Classify each of the following scenarios listed in the table below using the macroeconomic definitions of saving and investment.

 
Saving
Investment
Eleanor buys a new crane for her construction firm.
 
 
 
Kyoko purchases shares of stock in Bayzer, a pharmaceutical company.
 
 
 
Darnell buys a government bond.
 
 
 
Jacques takes out a mortgage for a new house in Cleveland.
 
 
 
 

Classify each of the following scenarios listed in the table below using the macroeconomic definitions of saving and investment.

 
Saving
Investment
Andrew purchases a certificate of deposit at his bank.
 
 
 
Beth buys a new crane for her construction firm.
 
 
 
Darnell purchases a new townhouse in Hartford.
 
 
 
Eleanor purchases shares of stock in Warm Breeze, a cloud computing company.
 
 
 
 

Classify each of the following scenarios listed in the table below using the macroeconomic definitions of saving and investment.

 
Saving
Investment
Jake takes out a mortgage for a new house in Cleveland.
 
Frances purchases new mixers for her commercial bakery.
 
Latasha purchases shares of stock in Bayzer, a pharmaceutical company.
 
Dmitri buys a government bond.
 
 
 
 
 
 

Classify each of the following scenarios listed in the table below using the macroeconomic definitions of saving and investment.

 
Saving
Investment
Maria borrows money to build an addition to a lab owned by her engineering firm.
 
Kevin purchases a corporate bond issued by an automotive firm.
 
Simone purchases stock in Tesqar, a biotech firm.
 
Rajiv takes out a loan and uses it to build a new cabin in Idaho.
 
 
 
 
 
 

4. 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 demand for loanable funds. As the interest rate falls, the quantity of loanable funds demanded.

 

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 %.

 

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.

01002003004005006007008009001000109876543210INTEREST RATE (Percent)LOANABLE FUNDS (Billions of dollars)Demand   Supply   

    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 5.5%. 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 

 

.

 

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.

0100200300400500600700800876543210INTEREST RATE (Percent)LOANABLE FUNDS (Billions of dollars)Demand   Supply   

    is the source of the demand for loanable funds. As the interest rate rises, the quantity of loanable funds demanded    .

Suppose the interest rate is 3.5%. 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 

 

 

is the source of the demand for loanable funds. As the interest rate falls, the quantity of loanable funds demanded    .

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 

 

 

5. The market for loanable funds and government policy

The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.)

 

Scenario 1: Individual Retirement Accounts (IRAs) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 per year.

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 within some 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 saving 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.

 

The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.)

DemandSupplyINTEREST RATE (Percent)LOANABLE FUNDS (Billions of dollars)Demand   Supply   

Scenario 1: Individual Retirement Accounts (IRAs) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is a decrease in the maximum contribution, from $6,000 to $4,000 per year.

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

This change in the tax treatment of interest income from 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 within some 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 saving to    .

Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense 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.

 

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 18%. Now suppose there is a decrease in the tax rate on interest income, from 18% to 14%.

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 within some relevant time period. Suppose the government implements a new investment tax credit.

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

The implementation of the new 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.

 

Scenario 1: Individual Retirement Accounts (IRAs) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 per year.

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 within some relevant time period. Suppose the government implements a new investment tax credit.

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

The implementation of the new tax credit causes the interest rate to    and the level of saving to    .

Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense 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.