MINDTAP Problems &Applications; (Ch 13) Three students have each saved s1,000. E
ID: 1126320 • Letter: M
Question
MINDTAP Problems &Applications; (Ch 13) Three students have each saved s1,000. 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 Return Student (Percent) Alex clancy Eileen 15 Assume borrowing and lending is prohibited, so each student uses only personel saving to finence his or her own investment project. Complete the following table with how much each student will have a year later when the project pays its return Money a Year Later (Dollars) Student Alex clancy Eileen Now suppose their school opens up a market for loanable funds in which students can borrow and lend amang themselves at an Iinterest rate If a student's expected rate of return is greater than r, he or she would choose to Suppose the interest rate is 6 percent Among these three students, the quantity of loanable funds supplied would be s,and quantity demanded would be Now suppose the interest rate is 12 percent Among these three students, the quantity of loanable funds supplied would be s , and quantity demanded would be At this interest rate, At an interest rate of % , the loanable funds market among these three students would be in eql bum would want to lend, would want to borrow, andExplanation / Answer
The supply of loanable fund curve is a positively sloped curve indicating the amount people want to save at each given level of interest rate. The slope of the curve indicates that as interest rate increases the amounts people want to save increases, and vice versa. The demand for loanable fund curve is a negatively sloped curve indicating the amount of fund the government and the firm demands at each given level of interest rate. The equilibrium in loanable funds market determines the amount of fund that is available and demanded in the economy.
The table below gives the return on $1000 investment for each person
Student
Return
Money a year later
A
4
1040
C
7
1070
E
15
1150
The rate of return in the loanable funds market is the price of the funds. The person with greater expected return from an investment project would demand more loan to invest and person with expected return less than this price would want to lend their funds in the market. The the person with higher return elsewhere will be demanded and person with lower return elsewhere will be supplier.
In the students expected rate of return is greater than r, he or she would choose to borrow.
Now if the interest rate is 12%, only E have greater expected return on invetsment that r. Then there will be 2 students supplying loan and 1 student demanding loan.
If the interest rate is 6%, both C and E have greater expected return on invetsment that r. Then there will be 1 student supplying loan and 2 students demanding loan.
This is summarized in the table below
Rate of return
Supply of loanable funds
Demand for loanable funds
12%
$2,000
$1,000
6%
$1,000
$2,000
The equilibrium in this market would occurat 7% rate of return. At this rate only E have greater expected return on invetsment that r and only A has lower expected rate of return. Then there will be 1 students supplying loan and 1 student demanding loan.
Thereore, at the interest rate 7%, Eileen would want to borrow and Alex would want to lend.
After 1 year the the funds becomes
Student
Return
Money a year later (without loanable funds market)
Money return on investment
Money retuned or paid at loanable funds market
Money a year later (with loanable funds market)
A
4
1040
0
1070
1070
C
7
1070
1070
0
1070
E
15
1150
2*1150=2300
-1070
1230
Then from compairing the money after 1 year column befor and after loanable funds market it can be said that no one made worse off after openning up of the market. Then the statement is
Student
Return
Money a year later
A
4
1040
C
7
1070
E
15
1150
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