Chapter 26. Exercises 6-9.

Chapter 26. Saving, Investment, and the Financial System. Exercises 6-9. Gregory Mankiw. Principles of Economics 7th Edition.
6. Suppose that Intel is considering building a new chipmaking factory.
a. Assuming that Intel needs to borrow money in the bond market, why would an increase in interest rates affect Intel’s decision about whether to build the factory?
b. If Intel has enough of its own funds to finance the new factory without borrowing, would an increase in interest rates still affect Intel’s decision about whether to build the factory? Explain.
7. Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the students’ investment projects:
a. If borrowing and lending is prohibited, so each student uses only personal saving to finance his or her own investment project, how much will each student have a year later when the project pays its return?
b. Now suppose their school opens up a market for loanable funds in which students can borrow and lend among themselves at an interest rate r. What would determine whether a student would choose to be a borrower or lender in this market?
c. Among these three students, what would be the quantity of loanable funds supplied and quantity demanded at an interest rate of 7 percent? At 10 percent?
d. At what interest rate would the loanable funds market among these three students be in equilibrium? At this interest rate, which student(s) would borrow and which student(s) would lend?
e. At the equilibrium interest rate, how much does each student have a year later after the investment projects pay their return and loans have been repaid? Compare your answers to those you gave in part (a). Who benefits from the existence of the loanable funds market—the borrowers or the lenders? Is anyone worse off?
8. 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. How does the elasticity of supply of loanable funds affect the size of these changes?
d. How does the elasticity of demand for loanable funds affect the size of these changes?
9. This chapter explains that investment can be increased both by reducing taxes on private saving and by reducing the government budget deficit.
a. Why is it difficult to implement both of these policies at the same time?
b. What would you need to know about private saving to judge which of these two policies would be a more effective way to raise investment?

[glamgirl]

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[jin.-.]

Thank you so so much <3 You saved me <3

[mehemmedeliyev]

When govenment borrows 20 billion dollars, why shouldn't Demand curve shift to right due to increase in quantity of borrowed money?

[marlonandresocualayaandrad]

Hey man! the equilibrium interes should be 8, 5% not 8%....O.o