BU204_02 _Barnes_Charity_ Unit9

BU204_02 _Barnes_Charity_ Unit9 - Unit 9 [BU204 |...

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Unit 9 [ BU204 | Macroeconomics ] Macroeconomics: Unit 9 BU204-02 By: Charity Barnes May 20, 2011 1
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Unit 9 [ BU204 | Macroeconomics ] Questions: 1. Define any key terms that you feel are important in answering the following question as they are defined in the textbook and explain, in your own words what those definitions mean (5 points), and then thoroughly analyze each of the following changes in the market for loanable funds to answer the these questions Use the diagrams below, resizing them as necessary, to illustrate your analysis in explaining what happens to private savings , private investment spending , and the rate of interest if the following events occur. Assume the economy is closed (no transactions are made with foreign countries). a. The government reduces the size of its deficit to zero (10 points). The equilibrium interest rate for $300 loaned for private borrowing is 8% and the equilibrium interest rate for $450 loaned for private and government borrowing is approx. 9%. The reason for this is could be because the economy is closed or because there are more people borrowing so in an effort to make more money on interest, the rates are increased. An economic situation is in equilibrium when no individual would be better off doing something different (Krugman and Wells, 2009). I would describe equilibrium as the meeting of two factors; in this case it would be interest rates and funds available to be borrowed. When looking at a diagram, it is where the vertical and horizontal (supply and demand) aspects cross each other’s path. In evaluation, I would say that as the availability of funds decreases, the interest rate does the same and as the amount of available funds increases, the interest rate does the same. The amount of private borrowing is less than that of private and government borrowing combined. Also, if the country reduces it deficit to ‘0’, there will be less demand for loanable funds equal to the decline in the deficit. 2
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Unit 9 [ BU204 | Macroeconomics ] b. At any given interest rate, consumers decide to save more. Assume the budget balance is zero (10 points). The equilibrium point for the first supply curve is for every $300 loaned, the interest rate is 8% and for every $400 (approximately) the interest rate is 4%. An economic situation is in equilibrium when no individual would be better off doing something different (Krugman and Wells, 2009). I would describe equilibrium as the meeting of two factors; in this case it would be interest rates and funds being loaned. When looking at a diagram, it is where the vertical and horizontal (supply and demand) aspects cross each other’s path. When evaluating this supply and demand graph I would say that as less money is loaned (less loans are being supplied), the interest rate will increase. It seems to me that there would be more people demanding or needing loans which would be why the supply curve has changed. If the supply stayed the same with the equilibrium at $300 and 8%,
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BU204_02 _Barnes_Charity_ Unit9 - Unit 9 [BU204 |...

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