Answers to review quizzes marcroeconomics 12e parkin chapter 7

12 12 0
  • Loading ...
1/12 trang

Thông tin tài liệu

Ngày đăng: 16/04/2018, 11:30

W H AT I S E C O N O M I C S ? 119 C h a p t e r FINANCE, SAVING, AND INVESTMENT** Answers to the Review Quizzes Page 202 (page 610 in Economics) Distinguish between physical capital and financial capital and give two examples of each Physical capital is the actual tools, instruments, machines, buildings and other items that have been produced in the past and are presently used to produce goods and services Financial capital is the funds that businesses use to acquire their physical capital Examples of physical capital are the pizza ovens owned by Pizza Hut and the buildings in which the Pizza Huts are located Examples of financial capital are the bonds issued by Pizza Hut to buy pizza ovens and the loans Pizza Hut has made to fund their purchases of new buildings What is the distinction between gross investment and net investment? Gross investment is the total amount spent on new capital; net investment is the change in the value of the capital stock Net investment equals gross investment minus depreciation What are the three main types of markets for financial capital? The main types of markets for financial capital are the loan markets, the bond markets, and the stock markets Explain the connection between the price of a financial asset and its interest rate There is an inverse relationship between the price of a financial asset and its interest rate When the price of a financial asset rises, its interest rate falls Similarly, when the interest rate on an asset falls, the price of the asset rises Page 209 (page 617 in Economics) What is the loanable funds market? The loanable funds market is the market in which households, firms, governments, banks, and other financial institutions borrow and lend It is the aggregate of all the individual financial markets and includes loan markets, bond markets, and stock markets The real interest rate is determined in this market Explain why the real interest rate is the opportunity cost of loanable funds 119 120 The real interest rate is the opportunity cost of loanable funds because the real interest rate measures what is forgone by using the funds If the funds are loaned, then the real interest rate is received If the funds are borrowed, then the real interest is paid for the funds The real interest rate forgone when funds are used either to buy consumption goods and services or to invest in new capital goods is the opportunity cost of not saving or not lending those funds How firms make investment decisions? To determine the quantity of investment, firms compare the expected profit rate from an investment to the real interest rate The expected profit from an investment is the benefit from the investment The real interest rate is the opportunity cost of investment If the expected profit from an investment exceeds the cost of the real interest rate, then firms make the investment If the expected profit from an investment is less than the cost of the real interest rate, then firms not make the investment What determines the demand for loanable funds and what makes it change? The demand for loanable funds depends on the real interest rate and expected profit If the real interest rate falls and nothing else changes, the quantity of loanable funds demanded increases Conversely, if the real interest rate rises and everything else remains the same, the quantity of loanable funds demanded decreases Movements along the loanable funds demand curve illustrate these events If the expected profit increases and nothing else changes, the demand for loanable funds increases and the demand for loanable funds curve shifts rightward If the expected profit decreases and everything else remains the same, the demand for loanable funds decreases and the demand for loanable funds curve shifts leftward How households make saving decisions? A household’s saving depends on five factors: the real interest rate, the household’s disposable income, the household’s expected future income, wealth, and default risk A household increases its saving if the real interest rate increases, its disposable income increases, its expected future income decreases, its wealth decreases, or if default risk decreases What determines the supply of loanable funds and what makes it change? The supply of loanable funds depends on the real interest rate, disposable income, expected future income, wealth, and default risk An increase in the real interest rate increases the quantity of loanable funds supplied; a decrease in the real interest rate decreases the quantity of loanable funds supplied An increase in disposable income increases the supply of loanable funds; a decrease in disposable income decreases the supply of loanable funds An increase in wealth decreases the supply of loanable funds; a decrease in wealth increases the supply of loanable funds An increase in expected future income decreases the supply of loanable funds; a decrease in expected future income increases the supply of loanable funds Finally, an increase in default risk decreases the supply of loanable funds; a decrease in default risk increases the supply of loanable funds How changes in the demand for and supply of loanable funds change the real interest rate and quantity of loanable funds? The real interest rate is determined by the supply of loanable funds and the demand for loanable funds The equilibrium real interest rate is the real interest rate at which the quantity of loanable funds supplied equals the quantity of loanable funds demanded Changes in the demand for or supply of loanable funds change the equilibrium real interest rate and equilibrium quantity of loanable funds If the demand for loanable funds increases and the supply does not change, the real interest rate rises and the quantity of loanable funds increases If the 120 W H AT I S E C O N O M I C S ? 121 demand for loanable funds decreases and the supply does not change, the real interest rate falls and the quantity of loanable funds decreases If the supply of loanable funds increases and the demand does not change, the real interest rate falls and the quantity of loanable funds increases If the supply of loanable funds decreases and the demand does not change, the real interest rate rises and the quantity of loanable funds decreases Page 211 (page 619 in Economics) How does a government budget surplus or deficit influence the loanable funds market? A government budget surplus adds to the supply of loanable funds A government budget deficit adds to the demand for loanable funds What is the crowding-out effect and how does it work? The crowding-out effect refers to the decrease in investment that occurs when the government budget deficit increases An increase in the government budget deficit increases the demand for loanable funds As a result the real interest rate rises The rise in the real interest rate decreases—“crowds out”—investment What is the Ricardo-Barro effect and how does it modify the crowding-out effect? The Ricardo-Barro effect points out that the crowding out effect is less than predicted by looking only at the effect of a budget deficit on the demand for loanable funds The Ricardo-Barro effect asserts that as a result of a government budget deficit households increase their saving to pay the higher taxes that will be needed in the future to repay the debt issued to fund the deficit The increase in saving increases the supply of loanable funds This increase in the supply of loanable funds offsets the rise in the real interest rate from the increase in the demand for loanable funds caused by the budget deficit Because the real interest rate does not rise as much, the decrease in investment, that is the amount of crowding out, is less in the presence of the Ricardo-Barro effect 121 Answers to the Study Plan Problems and Applications Use the following data to work Problems and Michael is an Internet service provider On December 31, 2014, he bought an existing business with servers and a building worth $400,000 During 2015, his business grew and he bought new servers for $500,000 The market value of some of his older servers fell by $100,000 What was Michael’s gross investment, depreciation, and net investment during 2015? Michael’s gross investment was $500,000, his depreciation was $100,000, and his net investment was $400,000 What is the value of Michael’s capital at the end of 2015? Michael’s capital at the end of 2015 is equal to his capital at the beginning of 2015, $400,000, plus his net investment during the year, also $400,000, for a total of $800,000 Lori is a student who teaches golf on Saturdays In a year, she earns $20,000 after paying her taxes At the beginning of 2014, Lori owned $1,000 worth of books, DVDs, and golf clubs and she had $5,000 in a savings account at the bank During 2014, the interest on her savings account was $300 and she spent a total of $15,300 on consumption goods and services There was no change in the market values of her books, DVDs, and golf clubs a How much did Lori save in 2014? Lori’s saving equals her disposable income minus her consumption expenditure Lori’s disposable income is $20,000 plus the interest on her savings account, $300, for a total of $20,300.Her consumption expenditure is $15,300, so her saving is $5,000 b What was her wealth at the end of 2014? Lori’s wealth at the end of 2014 is equal to the value of her wealth at the beginning of 2014 plus her saving during the year At the beginning of 2014 Lori’s wealth is $6,000—the value of her books, DVDs, golf clubs, and savings account Lori saved $5,000 during 2014 so her wealth at the end of the year is $11,000 Treasury Yields Fall to Two-Week Low Treasury bond prices rose on Monday, pushing interest rates down The interest rate on 10-year bonds fell basis points to 1.65% Source: The Wall Street Journal, August 27, 2012 What is the relationship between the price of a treasury bond and its interest rate? Why does the interest rate move inversely to price? When the price of a treasury bond rises, its interest rate falls This inverse relationship exists because of the definition of an interest rate The interest rate equals the amount paid as interest divided by the price of the security, then multiplied by 100 When the price rises, mathematically the interest rate must fall F I N A N C E , S AV I N G , A N D I N V E S T M E N T Use the following information to work Problems and First Call, Inc., a smartphone company, plans to build an assembly plant that costs $10 million if the real interest rate is percent a year or a larger plant that costs $12 million if the real interest rate is percent a year or a smaller plant that costs $8 million if the real interest rate is percent a year Draw a graph of First Call’s demand for loanable funds curve Figure 7.1 shows First Call’s demand for loanable funds curve First Call expects its profit to double next year Explain how this increase in expected profit influences First Call’s demand for loanable funds When First Call expects its profit to increase, First Call increases its investment The increase in its investment leads First Call to increase its demand for loanable funds The table sets out data for an economy when the government’s budget is balanced a Calculate the equilibrium real interest rate, investment, and private saving The equilibrium real interest rate is percent per year The equilibrium quantity of investment equals the quantity of loanable funds demand, $7.0 trillion and the equilibrium quantity of saving equals the quantity of loanable funds supplied, $7.0 trillion Real interest rate (percent per year) 10 Loanable Loanable funds funds demanded supplied (trillions of 2009 dollars) 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.5 6.0 6.5 7.0 7.5 8.0 8.5 b If planned saving increases by $0.5 trillion at each real interest rate, explain the change in the real interest rate The increase in saving increases the supply of loanable funds The equilibrium real interest rate falls In the table, the new equilibrium real interest rate is 6.5 percent per year c If planned investment increases by $1 trillion at each real interest rate, explain the change in the real interest rate The increase in investment increases the demand for loanable funds The equilibrium real interest rate rises In the table, the new equilibrium real interest rate is percent per year 89 90 CHAPTER Use the data in Problem to work Problems and If the government’s budget becomes a deficit of $1 trillion, what are the real interest rate and investment? Does crowding out occur? The equilibrium real interest rate becomes percent and the equilibrium quantity of investment is $6.5 trillion There is crowding out of $500 billion of investment If the government’s budget becomes a deficit of $1 trillion and the RicardoBarro effect occurs, what are the real interest rate and the investment? The equilibrium real interest rate remains percent and the quantity of investment remains $7.0 trillion There is no crowding out because the $1 trillion increase in the budget deficit leads to an offsetting $1 trillion increase in private saving Use the table in Problem and the following data to work Problems 10 and 11 Suppose that the quantity of loanable funds demanded increases by $1 trillion at each real interest rate and the quantity of loanable funds supplied increases by $2 trillion at each interest rate 10 11 If the government budget remains balanced, what are the real interest rate, investment, and private saving? Does any crowding out occur? The table to the right, which Real interest Loanable Loanable shows the new demand for rate funds funds loanable funds and new supply demanded supplied of loanable funds schedules, is (percent per (trillions of 2009 dollars) helpful to answer the problem year) The new real interest rate is 9.5 7.5 percent Investment and private 9.0 8.0 saving are both $8.5 trillion 8.5 8.5 There is no crowding out 8.0 9.0 If the government’s budget 7.5 9.5 becomes a deficit of $1 trillion, 7.0 10.0 what are the real interest rate, 10 6.5 10.5 investment, and private saving? Does any crowding out occur? The equilibrium real interest rate becomes percent The equilibrium quantity of investment is $8.0 trillion and the equilibrium quantity of private saving is $9.0 trillion There is crowding out of $500 billion of investment F I N A N C E , S AV I N G , A N D I N V E S T M E N T Answers to Additional Problems and Applications 12 On January 2014, the London Taxi Company owned cabs valued at £150,000 During 2014, the London Taxi Company bought new cabs for a total of £200,000 At the end of 2014, the market value of all of the cabs was £300,000 Calculate the London Taxi Company’s gross investment, depreciation, and net investment Gross investment was £200,000 Depreciation was 200,000 + 150,000  300,000 = £50,000 Net investment, equal to gross investment minus depreciation, was £150,000 Use the following information to work Problems 13 and 14 The Bureau of Economic Analysis reported that the U.S capital stock was $46.3 trillion at the end of 2010, $46.6 trillion at the end of 2011, and $47.0 trillion at the end of 2012 Depreciation in 2011 was $2.4 trillion, and gross investment during 2012 was $2.8 trillion (all in 2009 dollars) 13 Calculate U.S net investment and gross investment during 2011 Net investment equals the change in the capital stock In 2011, U.S net investment was $46.6 trillion  $46.3 trillion, which is $0.3 trillion Gross investment equals net investment plus depreciation In 2011, U.S gross investment was $0.3 trillion + $2.4 trillion, which is $2.7 trillion 14 Calculate U.S depreciation and net investment during 2012 Net investment equals the change in the capital stock In 2012, U.S net investment was $47.0 trillion  $46.6 trillion, which is $0.4 trillion Depreciation equals gross investment minus net investment In 2012, U.S depreciation was $2.8 trillion  $0.4 trillion, which is $2.4 trillion 15 Annie runs a fitness center On December 31, 2014, she bought an existing business with exercise equipment and a building worth $300,000 During 2015, business improved and she bought some new equipment for $50,000 At the end of 2015, her equipment and buildings were worth $325,000 Calculate Annie’s gross investment, depreciation, and net investment during 2015 Annie’s net investment during 2015 is $25,000 because that is the change in her capital stock Annie’s gross investment is $50,000 because that is her total purchase of capital equipment in 2015 Annie’s depreciation during 2015 is $25,000 because Annie’s net investment, $25,000, equals her gross investment, $50,000, minus her depreciation 16 John is a researcher at a university, and after he paid taxes, his income and interest from financial assets was $55,000 in 2013 At the beginning of 2013, he owned $3,000 worth of financial assets At the end of 2013, John’s financial assets were worth $5,000 a How much did John save during 2013? John’s wealth increased by $2,000 in 2013 So his saving in 2013 is $2,000, assuming there are no capital gains or losses on his stocks and bonds b How much did John spend on consumption goods and services? John’s income after taxes was $55,000 His consumption equals his income minus his saving, which is $55,000  $2,000 = $53,000 91 92 17 CHAPTER In a speech at the CFA Society of Nebraska in February 2007, William Poole (former Chairman of the St Louis Federal Reserve Bank) said: Over most of the post-World War II period, the personal saving rate averaged about percent, with some higher rates from the mid-1970s to mid-1980s The negative trend in the saving rate started in the mid-1990s, about the same time the stock market boom started Thus it is hard to dismiss the hypothesis that the decline in the measured saving rate in the late 1990s reflected the response of consumption to large capital gains from corporate equity [stock] Evidence from panel data of households also supports the conclusion that the decline in the personal saving rate since 1984 is largely a consequence of capital gains on corporate equities a Is the purchase of corporate equities part of household consumption or saving? Explain your answer The purchase of corporate equities, that is, shares of corporate stock, is part of household saving Consumption refers to the purchase of goods and services that are then consumed, but corporate equities are not consumable goods or services b Equities reap a capital gain in the same way that houses reap a capital gain Does this mean that the purchase of equities is investment? If not, explain why it is not The purchase of equities is not an investment because investment refers to the purchase of physical capital Equities are not physical capital and so they are not investment 18 Draw a graph to illustrate the effect of an increase in the demand for loanable funds and an even larger increase in the supply of loanable funds on the real interest rate and the equilibrium quantity of loanable funds Figure 7.2 shows the effect of an increase in the demand for loanable funds and an even larger increase in the supply of loanable funds The demand curve for loanable funds shifts rightward from DLF0 to DLF1, and the supply curve of loanable funds shifts rightward from SLF0 to SLF1 The increase in supply is larger than the increase in demand, so the real interest rate falls (from percent to percent in the figure) and the quantity of loanable funds increases (from $2.3 trillion to $2.7 trillion in the figure) F I N A N C E , S AV I N G , A N D I N V E S T M E N T 19 Draw a graph to illustrate how an increase in the supply of loanable funds and a decrease in the demand for loanable funds can lower the real interest rate and leave the equilibrium quantity of loanable funds unchanged Figure 7.3 shows the effect of an increase in the supply of loanable funds and a decrease in the demand for loanable funds The supply of loanable funds curve shifts rightward from SLF0 to SLF1, and the demand for loanable funds curve shifts leftward from DLF0 to DLF1 The magnitude of the increase in supply is equal to the magnitude of the decrease in demand, so the real interest rate falls (from percent to percent in the figure) and the quantity of loanable funds does not change (staying at $2.5 trillion in the figure) Use the following information to work Problems 20 and 21 In 2012, the Lee family had disposable income of $80,000, wealth of $140,000, and an expected future income of $80,000 a year At a real interest rate of percent a year, the Lee family saves $15,000 a year; at a real interest rate of percent a year, they save $20,000 a year; and at a real interest rate of percent, they save $25,000 a year 20 Draw a graph of the Lee family’s supply of loanable funds curve Figure 7.4 shows the Lee family’s supply of loanable funds curve 21 In 2013, suppose that the stock market crashes and the default risk increases Explain how this increase in default risk influences the Lee family’s supply of loanable funds curve If default risk increases the Lee family will decrease its saving As a result, the Lee family’s supply of loanable funds decreases and its supply of loanable funds curve shifts leftward 93 94 22 CHAPTER Gunvor Becomes Major Winner in Rosneft Oil Tender Trading house Gunvor is among the winners of a large Rosneft tender Gunvor would lift up to 400,000 tonnes of Russian Urals crude per month from the Baltic Sea port of Primorsk in April-September Source: Reuters, March 17, 2015 On a graph, show the effect of Gunvor going to the loanable funds market to finance its operation Explain the effect on the real interest rate, private saving, and investment Gunvor’s demand for financial capital to fund its operation increases the demand for loanable funds As Figure 7.5 illustrates, the demand curve for loanable funds shifts rightward from DLF0 to DLF1 The real interest rate rises Private saving and investment both increase 23 The table sets out the data for an economy when the government’s budget is balanced a Calculate the equilibrium real interest rate, investment, and private saving The equilibrium real interest rate is percent per year Equilibrium investment equals the quantity of loanable funds demanded, $6.0 trillion Equilibrium saving equals the quantity of loanable funds supplied, (also) $6.0 trillion Real interest rate (percent per year) Loanable Loanable funds funds demanded supplied (trillions of 2009 dollars) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 b If planned saving decreases by $1 trillion at each real interest rate, explain the change in the real interest rate and investment If planned saving increases by $1 trillion, the supply of loanable funds increases Consequently the equilibrium real interest falls and the equilibrium quantity of investment increases In the table, the equilibrium real interest rate falls to 3.5 percent and equilibrium investment increases to $6.5 trillion c If planned investment decreases by $1 trillion at each real interest rate, explain the change in saving and the real interest rate If planned investment decreases by $1 trillion, the demand for loanable funds decreases Consequently the equilibrium real interest falls and the equilibrium quantity of saving decreases In the table, the equilibrium real interest rate falls to 3.5 percent and equilibrium saving decreases to $5.5 trillion F I N A N C E , S AV I N G , A N D I N V E S T M E N T Use the following information to work Problems 24 and 25 India’s Economy Hits the Wall At the start of 2008, India had an annual growth of percent, huge consumer demand, and increasing investment But by July 2008, India had large government deficits and rising interest rates Economic growth is expected to fall to percent by the end of 2008 A Goldman Sachs report suggests that India needs to lower the government’s deficit and raise educational achievement Source: Business Week, July 1, 2008 24 If the Indian government reduces its deficit and returns to a balanced budget, how will the demand for or supply of loanable funds in India change? If the Indian government reduces its deficit, the demand for loanable funds decreases 25 With economic growth forecasted to slow, future incomes are expected to fall If other things remain the same, how will the demand or supply of loanable funds in India change? If expected future incomes slow, the major effect is an increase in the supply of loanable funds as households’ increase their saving 26 Sovereign Debt Markets in Turbulent Times: A View of the European Crisis At the end of 2009, the share of debt held by the private sector increased and as domestic banks allocated increasing amounts of funds to the public sector, product investment declined, further deepening the recession in Greece Source: VoxEU.org, July 23 2014 Explain how the increase in public debt would deepen the Greek crisis The large deficits increase the demand for loanable funds and, in the absence of a Ricardo-Barro effect, raise the real interest rate and crowd out investment The decrease in investment means that the capital stock of Greece is lower than would otherwise be the case, which will decrease economic growth, deepening the recession in Greece Economics in the News 27 After you have studied Economics in the News on pp 212–213 (620–621 in Economics), answer the following questions a Why does the news article say that bond prices and interest rates move in opposite directions? Is it correct? Explain The article says that bond prices and interest rates move in opposite directions because the interest rate is the interest received as the percentage of the price of the asset In terms of a formula, if INT is the interest received and PRICE is the price of the asset, then the interest rate is (INT ÷ PRICE) × 100 Therefore, if the price of the asset rises, the percentage of the asset price received as interest, which is the interest rate, falls b How does a government budget deficit influence the loanable funds market and why does a decrease in the deficit lower the interest rate? If the government runs a deficit, the demand for loanable funds increases If the deficit decreases, the demand for loanable funds decreases which lowers the interest rate 95 96 CHAPTER c When an economic expansion gets going, what happens to the demand for loanable funds and the interest rate? An economic expansion increases the demand for loanable funds The increase in the demand for loanable funds raises the interest rate d If an expanding economy increases government tax revenue, how will that affect the loanable funds market and the real interest rate? If the government’s tax revenue increases, the government’s budget deficit shrinks The decrease in the government budget deficit decreases the demand for loanable funds, thereby lowering the interest rate e Looking at Fig on p 213 (page 621 in Economics), what must have happened to either the demand for or the supply of loanable funds during 2011, 2012, and 2013? In 2011 the interest rate fell, was low in 2012, and then started to rise in 2013 In 2011, either the demand for loanable funds decreased and/or the supply of loanable funds increased In 2012, either the demand and supply of loanable funds did not change or they both changed in the same direction by the same amount Finally in 2013, either the demand for loanable funds increased and/or the supply of loanable funds decreased 28 Huge Growth in Private Students Taking State Loans Compared to £52 million for 6,574 students in 2010, around 53,000 students received about £675 million a year in 2013–14 in the form of student loans from the state Source: BBC News, January 26, 2015 a How state loans influence the government’s budget? The government’s budget is equal to revenue minus spending An increase in state loans will increase the total spending and the overall budget There will be a budget deficit if revenues are not enough to cover the additional spending b If there is a budget deficit, how would you expect it to influence the demand for loanable funds and the equilibrium real interest rate? The increase in total spending will increase the demand for loanable funds The demand for loanable funds curve shifts upward If there is no change in the interest rate, the demand for loanable funds will be greater than the supply of loanable funds Hence, there is an excess in the demand of loanable funds that would push the equilibrium real interest rate upward ... Loanable Loanable funds funds demanded supplied (trillions of 2009 dollars) 8.5 8.0 7. 5 7. 0 6.5 6.0 5.5 5.5 6.0 6.5 7. 0 7. 5 8.0 8.5 b If planned saving increases by $0.5 trillion at each real interest... higher rates from the mid-1 970 s to mid-1980s The negative trend in the saving rate started in the mid-1990s, about the same time the stock market boom started Thus it is hard to dismiss the hypothesis... government budget deficit households increase their saving to pay the higher taxes that will be needed in the future to repay the debt issued to fund the deficit The increase in saving increases the
- Xem thêm -

Xem thêm: Answers to review quizzes marcroeconomics 12e parkin chapter 7 , Answers to review quizzes marcroeconomics 12e parkin chapter 7

Gợi ý tài liệu liên quan cho bạn

Nhận lời giải ngay chưa đến 10 phút Đăng bài tập ngay