- Economists in Funlandia, a closed economy, have collected the following information about the economy for a particular year:
Y = 10,000
C = 6,000
T = 1,500
G = 1,700
The economists also estimate that the investment function is:
I = 3,300 – 100r
Where r is the country’s real interest rate, expressed as a percentage. Calculate private saving, public saving, national saving, investment, and the equilibrium real interest rate. - Suppose the government borrows $20 billion more next year than this year.
(a) Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall?
(b) What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the $20 billion of extra government borrowing.
(c) Suppose households believe that greater government borrowing today implies higher taxes to pay o? the government debt in the future. What does this belief do to private saving and the supply of loanable funds today? Does it increase or decrease the e?ects you discussed in parts (a) and (b)? - In the summer of 2010, Congress passed a far-reaching ?nancial reform to prevent another ?nancial crisis like the one experience in 2008 – 2009. Consider the following possibilities:
(a) Suppose that, by requiring ?rms to comply with strict regulations, the bill increases the costs of invest- ment. On a well-labeled graph, show the consequences of the bill in the market for loanable funds. Be sure to specify changes in the equilibrium interest rate and level of saving and investment. What are the e?ects of the bill on long-run economic growth?
(b) Suppose, on the other hand, that by e?ectively regulating the ?nancial system, the bill increases saver’s con?dence in the ?nancial system. Show the consequences of the policy in this situation on a new graph, again noting changes in the equilibrium interest rate and level of saving and investment. Again evaluate the e?ects on the long-run growth. - A company has an investment project that would cost $10 million today and yield a payo? of $15 million in 4 years.
(a) Should the ?rm undertake the project if the interest rate is 11 percent? 10 percent? 9 percent? 8 percent?
(b) Can you ?gure out the exact cuto? for the interest rate between pro?tability and non pro?tability? - Bond A pays $8,000 in 20 years. Bond B pays $8,000 in 40 years. (To keep things simple, assume these are zero-coupon bonds, which means the $8,000 is the only payment the bond holder receives)
(a) If the interest rate is 3.5 percent, what is the value of each bond today? Which bond is worth more? Why?
(b) If the interest ate increases to 7 percent, what is the value of each bond? Which bond has a larger percentage change in value?
(c) Based on the example above, complete the two blanks in this sentence: ?The value of a bond [rises/falls] when the interest rate increases, and bonds with a longer time to maturity are [more/less] sensitive to changes in the interest rate.?
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Fall 2019 Principles of Macroeconomics T. Tung - Your bank account pays an interest rate of 8 percent. You are considering buying a share of stock in XYZ corporation for $110. After 1, 2, and 3 years, it will pay a dividend of $5. You expect to sell the stock after 3 years for $120. Is XYZ a good investment? Support your answer with calculations.
- For each of the following kinds of insurance, give an example of behavior that can be called moral hazard and another example of behavior that can be called adverse selection.
(a) Health insurance (b) Car insurance - Jamal has a utility function U = W(1/2), where W is his wealth in millions of dollars (which determines how much he gets to buy and consume over his lifetime) and U is the utility he obtains.
(a) Graph Jamal’s utility function. Is he risk averse? Explain
(b) In the ?nal stage of a game show, the host o?ers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability of 0.6 and $9 million with probability 0.4 Should Jamal pick A or B? Explain your reasoning with appropriate calculations (Hint: The expected value of a random variable is the weighted average of the possible outcomes, where the probabilities are the weights). - The
employed, 15,260,000 were unemployed, and 82,614,000 were not in the labor force. Use this information to calculate:
(a) The adult population (b) The labor force
(c) The labor-force participation rate (d) The unemployment rate - Are the following workers more likely to experience short-term or long-term unemployment? Explain
(a) A construction worker laid o? because of bad weather
(b) A manufacturing worker who loses her job at a plan in an isolated area
(c) A stagecoach-industry worker laid o? because of competition from railroads
(d) A short-order cook who loses his job when a new restaurant opens across the street
(e) An expert welder with little formal education who loses her job when the company installs automatic welding machinery - Using a diagram of the labor market, show the e?ect of an increase in the minimum wage on the wage paid to workers, the number of workers supplied, the amount of workers demanded, and the amount of unemployment.
Bureau of Labor Statistics announced that in April 2010, of all adult Americans, 139,455,000 were
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