978-0133460629 Chapter 10 Part 10

Unlock access to all the studying documents.

View Full Document

13) At the beginning of the year, United Delivery had trucks valued at $1.3 million. During

the year, United Delivery purchased new trucks valued at $500,000. If the value of the

trucks at the end of the year was $1.5 million, what is the amount of its net investment and

its depreciation during the year?

Skill: Level 3: Using models

Section: Checkpoint 10.1

Status: Old

AACSB: Analytical thinking

10.7 Essay: The Loanable Funds Market

1) “An increase in the real interest rate increases the quantity of investment.” Is the

previous statement correct or incorrect?

Skill: Level 2: Using deinitions

Section: Checkpoint 10.2

Status: Old

AACSB: Relective thinking

2) Explain the relationship between the real interest rate and investment demand.

Compare that relationship to the relationship between expected proit and investment

demand.

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Written and oral communication

3) How does an increase in expected proit afect investment demand and the demand for

loanable funds curve?

Skill: Level 2: Using deinitions

Section: Checkpoint 10.2

Status: Old

AACSB: Relective thinking

4) Does a change in the real interest rate shift the supply of loanable funds curve? Explain

your answer.

curve. Instead, the change in the real interest rate results in a change in the quantity of

loanable funds supplied and a movement along the supply of loanable funds curve. The

supply of loanable funds curve shifts if some factor that inluences the supply of loanable

funds other than the real interest rate changes.

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Written and oral communication

5) What are the factors that change saving and shift the supply of loanable funds curve?

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Written and oral communication

6) Explain how each of the following events would afect the supply of loanable funds

curve:

a. The economy is in a recession so people‘s disposable income is lower.

b. The stock market is booming so people’s wealth is higher.

c. The future looks a bit more grim, so expected future income is lower.

d. The real interest rate increases.

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Written and oral communication

7) “A shortage in the loanable funds market occurs when the quantity of loanable funds

supplied exceeds the quantity of loanable funds demanded.” Explain why this statement is

correct or incorrect.

Skill: Level 1: Deinition

Section: Checkpoint 10.2

Status: Old

AACSB: Relective thinking

8) “In the loanable funds market, when there is a shortage of funds, the real interest rate

will increase.” Explain whether the previous statement is correct or not.

Skill: Level 1: Deinition

Section: Checkpoint 10.2

Status: Old

AACSB: Relective thinking

9) In the loanable funds market, what will change to eliminate a shortage of loanable funds

and how is the shortage eliminated?

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Written and oral communication

10) How does each of the following shift the supply of loanable funds and the demand for

loanable funds curves? What is the efect of each on the equilibrium real interest rate and

equilibrium quantity of loanable funds?

a. Households’ disposable incomes increase

b. An increase in expected proit

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Analytical thinking

11) Suppose a government tax cut increases disposable income. If there is no change in the

government deicit or surplus, what efect would this tax cut have on the supply of loanable

funds and the demand for loanable funds? What will happen to the real interest rate?

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Analytical thinking

12) The table above shows the supply of loanable funds and the demand for loanable funds

schedules.

a. What is the equilibrium real interest rate and the equilibrium quantity of loanable

funds?

b. If the real interest rate is 4 percent, is there a shortage or surplus? What will happen in

the market?

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Analytical thinking

13) Using the igure above, show the efect on the real interest rate and the quantity of

loanable funds of an increase in expected proit.

Skill: Level 3: Using models

Section: Checkpoint 10.2

Status: Old

AACSB: Analytical thinking

10.8 Essay: Government in Loanable Funds Market

1) Ignoring the Ricardo-Barro efect, what impact does the government have in the

loanable funds market?

Skill: Level 2: Using deinitions

Section: Checkpoint 10.3

Status: Old

AACSB: Relective thinking

2) Explain how a government budget deicit might crowd out private investment.

Skill: Level 2: Using deinitions

Section: Checkpoint 10.3

Status: Old

AACSB: Written and oral communication

3) “The crowding-out efect occurs when a government budget surplus reduces private

savings.” Is the previous statement true or false? Explain your answer.

Skill: Level 2: Using deinitions

Section: Checkpoint 10.3

Status: Old

AACSB: Written and oral communication

4) “A government surplus can decrease investment through the crowding-out efect

because the surplus decreases the supply of loanable funds.” Is the previous assertion right

or wrong? Why?

Skill: Level 2: Using deinitions

Section: Checkpoint 10.3

Status: Old

AACSB: Analytical thinking

5) According to the crowding-out efect, if the government runs a budget deicit of $100

billion, what is the change in the equilibrium quantity of investment?

Skill: Level 3: Using models

Section: Checkpoint 10.3

Status: Old

AACSB: Analytical thinking

6) What is the crowding-out efect and how does it operate? What is its relationship to the

Ricardo-Barro efect?

Skill: Level 3: Using models

Section: Checkpoint 10.3

Status: Old

AACSB: Analytical thinking

7) Discuss why a budget deicit results in a diferent real interest rate under the Ricardo–

Barro efect than under the crowding-out efect.

Skill: Level 3: Using models

Section: Checkpoint 10.3

Status: Old

AACSB: Written and oral communication

8) According to the Ricardo-Barro efect, if the government runs a budget deicit of $100

billion, by how much does the amount of equilibrium investment increase or decrease?

Skill: Level 3: Using models

Section: Checkpoint 10.3

Status: Old

AACSB: Written and oral communication

9) According to the Ricardo-Barro efect, what is the efect on the real interest rate of a

government budget surplus?

Skill: Level 5: Critical thinking

Section: Checkpoint 10.3

Status: Old

AACSB: Analytical thinking

10) The table above gives the demand for loanable funds and private supply of loanable

funds schedules.

a. What is the equilibrium real interest rate and quantity of loanable funds?

b. Suppose that the government has a budget surplus of $2.5 billion. If there is no

Ricardo-Barro efect, what is the equilibrium real interest rate and quantity of loanable

funds?

Skill: Level 3: Using models

Section: Checkpoint 10.3

Status: Old

AACSB: Analytical thinking