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BROCK UNIVERSITY
Econ 1P92, Winter 2021
Department of Economics
Assignment 4-Answer Key

Due: In Dropbox on Sakai by October 11, 2022 by 9am (Brock time).

Instructions: Hand in answers to the following questions. You can convert your file to a
PDF file and upload it to Dropbox. No late assignments will be accepted. Please put your
name and student number on your assignment. Total marks:50
1. Identify each of the following actions as representing either saving or investment.(10
marks, 2 marks each)
a. Fred uses some of his income to buy government bonds. Saving
b. Julie takes some of her income and buys mutual funds. Saving
c. Alex hires a contractor to add two additional examination rooms to his dental office
using borrowed funds. Investment
d. Elaine uses some of her savings to buy stock for her new clothing boutique.
Investment
e. Henrietta hires a builder to construct a new home using borrowed funds. Investment

2. Your cousin wants to buy either stock or bonds in Holistic Healing Inc., but he isn’t sure
which to buy. Explain how each of his quotes below should affect his choice between the
stock and the bond. (6 marks, 2 marks each)

a. “I have reason to believe that the company will be announcing a new holistic
remedy that has amazing health benefits.”
Choose stocks as return on them will likely be better than bonds.

b. “I would like to tell people I am part owner of Holistic Healing Inc.”

Choose stocks if you want to be part owner of a company

c. “I do not want to take on much risk.”

Choose bonds, as they are less risky.
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3. Who purchased the correct asset to meet their objective? (1 mark)

a. Becky wanted to be a part owner of the Main Event party store, so she purchased
a bond issued by the Main Event party store.
b. Ashvin wanted a high return even if it meant taking some risk, so he
purchased shares issued by West Wind Power instead of bonds issued by
West Wind Power.
c. Shannon wanted to buy equity in Apple, so she purchased bonds sold by Apple.
d. Jim wanted to lend money at a specified rate of interest to Shopify, so he
purchased Shopify shares.

4. In the national income accounting identity showing the equality between national saving
and investment, what is the representation of private saving and what is the representation
of public saving? (2 marks)
S=Y–C–G
S = (Y -T – C) + (T – G)
Y- T – C is private saving
T -G is public saving

5. Suppose GDP is $800 billion, taxes are $150 billion, private saving is $50 billion, and
public saving is $20 billion. Assuming this economy is closed, calculate consumption,
government purchases, national saving and investment. (8 marks)
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Private saving = Y – T -C
50 = 800 – 150 – C
50 = 650 – C
C = 600
Public saving = T – G
20 = 150 – G
G = 130
National saving = Y – C – G
S = 800 – 600 – 130
S = 70
Since S = I
I = 70

6. Suppose Suncor Energy sells a bond. What is the company doing? (1 mark)
a. borrowing directly from the public b. borrowing indirectly from the public
c. lending directly to the public d. lending indirectly to the public

7. Suppose a country repeals its investment tax credit. What is most likely to happen in the
market for loanable funds? (1 mark)
a. The demand for and the supply of loanable funds would shift to the right.
b. The demand for and the supply of loanable funds would shift to the left.
c. The supply of loanable funds would shift to the right, and the demand for loanable
funds would shift to the left.
d. The supply of loanable funds would remain unchanged, and the demand for
loanable funds would shift to the left.
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8. Which of the following occurs when the government collects more in tax revenue than it
spends, and households consume more than they get in after-tax income? (1 mark)
a. private and public saving are both positive
b. private and public saving are both negative
c. private saving is positive, but public saving is negative
d. private saving is negative, but public saving is positive

9. A closed economy has income of $1000, government spending of $200, taxes of $150,
and investment of $250. What is private saving? (1 mark)

a. $100
b. $200
c. $300
d. $400

10. If a popular TV show on personal finance convinces more Canadians about the
importance of saving for retirement, the ___________ curve for loanable funds would
shift, driving the equilibrium interest rate ____________. (1 mark)
a. supply, up
b. supply, down
c. demand, up
d. demand, down
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11. Nina wants to buy and operate an ice-cream truck but doesn’t have the financial resources
to start the business. She borrows $5000 from her friend Max, to whom she promises an
interest rate of 7%, and gets another $10,000 from her friend David, to whom she
promises a third of her profits. Which of the following best describes this situation? (1
mark)
a. Max is a shareholder and Nina is a bondholder
b. Max is a shareholder and Davis is a bondholder
c. David is a shareholder and Nina is a bondholder
d. David is a shareholder and Max is a bondholder

12. Which of the following situations represent investment and saving? (8 marks, 2 marks
each)
a. Your family takes out a mortgage and buys a new house Investment

b. You use your $200 paycheque to buy stock in Bombardier Saving

c. Your roommate earns $100 and deposits it into her account at a bank Saving

d. You borrow $1000 from a bank to buy a car to use in your pizza delivery business
Investment

13. Table 8-2

The following table shows stock prices and volumes for a few hypothetical companies.

Company Yld% PE Vol 100s Hi Lo Close Net Chg

P 1.55 25.48 4,531,600 64.78 63.70 64.62 +.93
Q 3.20 29.71 3,765,700 36.98 36.21 58.52 +.16
R 2.50 30.33 1,350,200 59.55 59.26 36.33 +.21
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S 2.22 35.50 1,990,600 40.72 40.20 45.50 +.24

Refer to Table 8-2. Which company had the highest dollar dividend? (1 mark)
a. P b. Q
c. R d. S
14. How does the supply and demand for loanable funds model reflect an increase in the
goods and services tax rate? (1 mark)
a. The supply curve shifts to the left, while the demand curve remains unchanged.
b. The supply curve shifts to the right, while the demand curve remains
unchanged.
c. The supply curve remains unchanged, while the demand curve shifts to the left.
d. The supply curve remains unchanged, while the demand curve shifts to the right.

15. Which of the two bonds in each example would you expect to be the riskier? (6 marks, 2
marks each)

a. a Canadian government bond or a bond issued by the government of Zimbabwe

government of Zimbabwe
b. a government of Canada bond or a municipal bond of the same face value and term
municipal bond
c. a Suncor company bond or a bond issued by a new high tech start-up
high tech start-up

16. Assuming that other things remain the same, what effect does a government budget
deficit have on saving? (1 mark)
a. It increases both private and national saving.
b. It increases public saving but reduces national saving.
c. It reduces both public and national saving.
d. It reduces private saving but increases national saving.