Vu Thao Nguyen_11214481

PROBLEMS AND APPLICATIONS CHAP 26

1.
a. U.S government: because more stable economies have higher interest rates on
their bonds; considering the unstable, fickle nature of Eastern Europe's government
and economy. U.S bonds are a much safer bet with a much higher interest rate

b. The shorter the time, the higher the rate because it has less time to accumulate.
So a bond that repays the principal in 2020 has a higher interest rate than a bond
that repays the principal in 2040.

c. Coca Cola is a much more stable and profitable enterprise than the software
company I run in my garage so it has a higher interest rate.

d. New York State: the NY state has a strong history of fiscal responsibility, and
has managed its money much better than the spend- happy federal government.
NY bonds are much more likely to appreciate more due to fiscal responsibility,
hence have a higher interest rate.

2.
First, companies empower their representatives to hold stock within
the company since it gives the representatives the motivating force to
care almost the firm's benefits, not fair their own compensations. At that point, in
case representatives see squander or see ranges in which the firm can improve,
they will take activities that advantage the company since they know the value of
their stock will rise as a result. It too gives workers an additional incentive to
work difficult, knowing that in case the firm does well, they will profit. But from
an employee's point of view, owning stock within the company for which she or
he works can be unsafe. The employee's compensation or compensation is as of
now tied to how well the firm performs. If the firm has inconvenience,
the representative may well be laid of or have her or
his compensation diminished. In case the worker claims stock within the firm,
then there may be a double danger - the worker is unemployed or gets a
lower compensation and the esteem of the stock falls as well. So owning stock in
your possess company could be a very risky recommendation.
Most workers would be superior of differentiating - owning stock or bonds in
other companies.

3.
Saving occurs when income exceeds consumption while investment refers to the
purchase of new capital, such as equipment or buildings.
a, Your family takes out a mortgage and buys a new house – investment.
b, You use your $200 paycheck to buy a stock in AT&T – saving because you
don’t use $200 into consumption goods.
c, Your roommate earns $100 and deposits it in his account at a bank – saving.
d, You borrow $1000 from a bank to buy a car to use in your pizza delivery
business - investment, because the car is a form of capital good.

4.
Total GDP (Y) = $8 trillion
T= $1,5 trillion
Private saving= $0,5 trillion
Public saving= $0,2 trillion
Assume that this economy is closed => C, G, National saving, Investment =?

=> National Saving = 0,5 + 0,2 = $0,7 trillion = Investment.

Private saving= Y - T - C ⇔ 0,5 = 8 - 1,5 - C ⇔ C= $6 trillion.
Public saving= T - G ⇔ 0,2 = 1,5 - G ⇔ G =$1,3 trillion.

5.
Y=10000
C=6000
T=1500
G=1700.
The economists also estimate that the investment function is: I = 3300 - 100r
where r - country’s real interest rate (%). National Saving, Public Saving, Private
Saving, the equi real interest rate = ?

=> Private saving = Y - T - C = 10000 - 1500 - 6000 = 2500.

Public saving = T - G = 1500 - 1700 = -200
National saving = 2500 - 200 = 2300.
National saving = investment : 2300 = 3300 - 100r ⇔ r=10%.

6.
a. If interest rates increase, the cost of borrowing money to build the factory becomes
higher, so the returns from building the new plant may not be sufficient to cover the
costs. Thus, higher interest rates make it less likely that Intel will build the new factory
b. Even if Intel uses its own funds to build the factory, the rise in interest rates still
matters. There is an opportunity cost on the use of the funds. Instead of investing in the
factory, Intel could use the money to purchase bonds and earn the higher interest rate
available there. Intel will compare its potential returns from building the factory to the
potential return from the bond market. If interest rates rise, so that bond market returns
rise, Intel is again less likely to invest in the factory.

2
7.
a, Borrowing and lending are prohibited, use only personal saving.
A year later when the project pays its return, each student will have:
Harry: = 1000 * (1+0,05) = $1050.
Ron: = 1000 * (1+0,08) = $1080.
Hermione: = 1000 * (1+0,2) = $1200.

b, Obviously the interest rate r would determine. If the expected rate is greater than
the interest rate r, a student should choose to be a borrower. In contrast, if the
expected rate is less than the interest rate r, a student should choose to be a lender.

c,
- At the rate 7%:
• Ron and Hermione would be the borrower, each of them would borrow
$1000 to maximize his/her money => Demand = $2000
• Harry would be the lender so he would lend all of his money $1000 to
maximize his money => Supply = $1000
• => Demand > Supply => The supply is not enough for the demand at the
rate of 7%.

-xAt the rate 10%, Hermione would be the borrower:

• Demand = $1000. Ron and Harry would be the lender, and they would lend
all of their money.
=> Supply = $2000.
=> Demand < Supply => The demand is not enough for the supply at the
rate of 10%

d, The interest rate in equilibrium should be 8%. At this rate, Harry would be a
lender and Hermione would be a borrower. But Ron would neither be a lender nor
borrower. Ron should choose to save his money following his project. And now,
the loanable funds market has 2 students and the quantity of loanable funds
supplied and demanded are equal. ($1000)

e, At the equilibrium:
- Harry will have: 1000*(1+0,08) = $1080
- Ron will have: 1000*(1+0,08) = $1080.
- Hermione will have: 2000*(1+0,2) - 1000*(1+0,08) = $1320.
Because they have an opportunity to invest up to $2000 with the rate of their
projects. But Hermione must pay back $1000 with the interest rate of equilibrium
8%, because the supplied loanable funds have only $1000.
=> Both borrowers and lenders benefit from the existence of the loanable funds
market.

3
8. Suppose that the gov borrows $20 billion more next year than this year.
a, Because the gov borrows more, it can put the country into the situation of
crowding out => The fewer money to deposit in the bank or the mutual funds,
=> The supply curve would shift to the left => The interest rate rises.
b, Because the interest rate increases, so the Investment decreases (means that
National Saving decreases). The private saving also rises => The public saving
must fall.
c, If the supply of loanable funds is more elastic, the flatter the slope of the supply
curve will be.

9. A diminishment in private investment funds may make an expanded esteem

within the government budget shortfall. Decrease in charges diminishes the
government income collection and increments the budget shortage crevice within
the economy. To look at which of the given arrangements would be considered
more successful for expanding speculation, the flexibility of reserve funds due to
alter in charges. Moreover, in the event that the government shortage diminishes,
private investment to diminish. Venture versatility with reaction to intrigued rates
moreover decides the adequacy of speculation. More elastic request gets to be
supportive in arrangement alter within the economy.