Problem Set 2_Answers - Deskins Principles of...

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Deskins, Principles of Macroeconomics Problem Set 2 - Answers Chapter 8 - Questions 1. The financial system channels financial capital from savers to investors. The financial system consists of financial markets and financial intermediaries. Examples of financial markets are stock markets and bond markets. Examples of financial intermediaries include banks and mutual funds. 2. A diverse investment portfolio will reduce risk. A mutual fund is a good example of a financial institution that makes diversification easier. 4. Investment is the purchase of new capital. The quantity of investment equals national savings. 5. A reduction in the tax rate paid on interest income from savings accounts would increase private savings. This change would increase the supply of loanable funds, thereby decreasing the interest rate and increasing the quantity of savings and investment. 6. A government budget deficit is when the difference between government expenditures and tax receipts, when expenditures exceed receipts. A deficit will reduce the supply of loanable funds in the private sector, thereby increasing interest rates and decreasing the quantity of savings and investment. Chapter 8 - Problems 1. a) East European government b) 2025 typically c) Software company in your garage d) federal government (typically, but not always) 2. Companies encourage this type of behavior because it provides the workers with a greater incentive to be as productive as possible since it gives them a stronger interest in the company’s profitability. A worker might not want to hold stock in the company where he works because he would prefer to diversity his holdings over a large number of assets. 3. a) investment b) savings c) savings d) investment 4. Consumption = $6 trillion, Government purchases = $1.3 trillion, National savings = $0.7 trillion, Investment = $0.7 trillion. 9. a) If the requirements increase the cost of investment, the demand for loanable funds will decline, which will reduce the interest rate and the quantity of savings and investment. B) If the changes increase savers’ confidence in the financial system, the supply of loanable funds will increase, which will reduce interest rates and increase the quantity of savings and investment.
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Deskins, Solutions 2 Chapter 11 - Questions 2. Commodity money is a form of money that has an intrinsic value while fiat money has no intrinsic value. We typically use fiat money. 3. Demand deposits are bank deposits that can be withdrawn immediately. They are part of the money supply because they are commonly accepted for payment for goods and services.
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