The Investment and the loanable fund market of the economy.

Question

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Answer 1

Question

Definition Video Formula Definition Phenomenon in which market supply and demand balance each other. Market equilibrium is the economic state in which the market demand curve intersects the market supply curve, giving us the equilibrium price and equilibrium quantity for which a commodity can be sold and purchased in an economy. When market equilibrium is achieved, it suggests that all resources have been allocated efficiently and that there is just a distribution of income and resources in the economy. Video Formula

Chapter 18, Problem 7PA

Subpart (a):

To determine

The Investment and the loanable fund market of the economy.

Subpart (a):

Expert Solution

Explanation of Solution

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.

When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:

ReturnsHarry=Investment×(1+Interest rate)=1,000×(1+0.05)=1,000×1.05=1050

Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:

ReturnsRon=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, Ron will have $1,080 after one year.

ReturnsHermione=Investment×(1+Interest rate)=1,000×(1+0.20)=1,000×1.20=1200

Thus, Hermione will have $1,200 after one year.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (b):

To determine

The Investment and the loanable fund market of the economy.

Subpart (b):

Expert Solution

Explanation of Solution

When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (c):

To determine

The Investment and the loanable fund market of the economy.

Subpart (c):

Expert Solution

Explanation of Solution

When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the rate of return of 6 percent with the rate of interest, the rate of interest is higher. On the other hand, the rate of returns of Ron and Hermione is higher than the rate of interest of 7 percent and they both would like to borrow. So, the quantity of loanable funds demanded will be $2,000, while quantity of loanable funds supplied will be equal to $1,000.

When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (d):

To determine

The Investment and the loanable fund market of the economy.

Subpart (d):

Expert Solution

Explanation of Solution

The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund market equilibrium and thus the quantity demanded and supplied in the loanable fund market will be $1,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (e):

To determine

The Investment and the loanable fund market of the economy.

Subpart (e):

Expert Solution

Explanation of Solution

When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:

ReturnsRon & Harry=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:

ReturnsHermione=[Investment×(1+Interest rate)]−[Borrowed money×(1+Interest rate)]=[2,000×(1+0.20)]−[1,000×(1+0.08)]=(2,000×1.20)−(1,000×1.08)=2400−1080=1320

Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

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Answer 2

Question

Definition Video Formula Definition Phenomenon in which market supply and demand balance each other. Market equilibrium is the economic state in which the market demand curve intersects the market supply curve, giving us the equilibrium price and equilibrium quantity for which a commodity can be sold and purchased in an economy. When market equilibrium is achieved, it suggests that all resources have been allocated efficiently and that there is just a distribution of income and resources in the economy. Video Formula

Chapter 18, Problem 7PA

Subpart (a):

To determine

The Investment and the loanable fund market of the economy.

Subpart (a):

Expert Solution

Explanation of Solution

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.

When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:

ReturnsHarry=Investment×(1+Interest rate)=1,000×(1+0.05)=1,000×1.05=1050

Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:

ReturnsRon=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, Ron will have $1,080 after one year.

ReturnsHermione=Investment×(1+Interest rate)=1,000×(1+0.20)=1,000×1.20=1200

Thus, Hermione will have $1,200 after one year.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (b):

To determine

The Investment and the loanable fund market of the economy.

Subpart (b):

Expert Solution

Explanation of Solution

When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (c):

To determine

The Investment and the loanable fund market of the economy.

Subpart (c):

Expert Solution

Explanation of Solution

When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the rate of return of 6 percent with the rate of interest, the rate of interest is higher. On the other hand, the rate of returns of Ron and Hermione is higher than the rate of interest of 7 percent and they both would like to borrow. So, the quantity of loanable funds demanded will be $2,000, while quantity of loanable funds supplied will be equal to $1,000.

When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (d):

To determine

The Investment and the loanable fund market of the economy.

Subpart (d):

Expert Solution

Explanation of Solution

The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund market equilibrium and thus the quantity demanded and supplied in the loanable fund market will be $1,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (e):

To determine

The Investment and the loanable fund market of the economy.

Subpart (e):

Expert Solution

Explanation of Solution

When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:

ReturnsRon & Harry=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:

ReturnsHermione=[Investment×(1+Interest rate)]−[Borrowed money×(1+Interest rate)]=[2,000×(1+0.20)]−[1,000×(1+0.08)]=(2,000×1.20)−(1,000×1.08)=2400−1080=1320

Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Definition Video Formula Definition Phenomenon in which market supply and demand balance each other. Market equilibrium is the economic state in which the market demand curve intersects the market supply curve, giving us the equilibrium price and equilibrium quantity for which a commodity can be sold and purchased in an economy. When market equilibrium is achieved, it suggests that all resources have been allocated efficiently and that there is just a distribution of income and resources in the economy. Video Formula

Chapter 18, Problem 7PA

Subpart (a):

To determine

The Investment and the loanable fund market of the economy.

Subpart (a):

Expert Solution

Explanation of Solution

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.

When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:

ReturnsHarry=Investment×(1+Interest rate)=1,000×(1+0.05)=1,000×1.05=1050

Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:

ReturnsRon=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, Ron will have $1,080 after one year.

ReturnsHermione=Investment×(1+Interest rate)=1,000×(1+0.20)=1,000×1.20=1200

Thus, Hermione will have $1,200 after one year.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (b):

To determine

The Investment and the loanable fund market of the economy.

Subpart (b):

Expert Solution

Explanation of Solution

When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (c):

To determine

The Investment and the loanable fund market of the economy.

Subpart (c):

Expert Solution

Explanation of Solution

When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the rate of return of 6 percent with the rate of interest, the rate of interest is higher. On the other hand, the rate of returns of Ron and Hermione is higher than the rate of interest of 7 percent and they both would like to borrow. So, the quantity of loanable funds demanded will be $2,000, while quantity of loanable funds supplied will be equal to $1,000.

When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (d):

To determine

The Investment and the loanable fund market of the economy.

Subpart (d):

Expert Solution

Explanation of Solution

The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund market equilibrium and thus the quantity demanded and supplied in the loanable fund market will be $1,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (e):

To determine

The Investment and the loanable fund market of the economy.

Subpart (e):

Expert Solution

Explanation of Solution

When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:

ReturnsRon & Harry=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:

ReturnsHermione=[Investment×(1+Interest rate)]−[Borrowed money×(1+Interest rate)]=[2,000×(1+0.20)]−[1,000×(1+0.08)]=(2,000×1.20)−(1,000×1.08)=2400−1080=1320

Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Definition Video Formula Definition Phenomenon in which market supply and demand balance each other. Market equilibrium is the economic state in which the market demand curve intersects the market supply curve, giving us the equilibrium price and equilibrium quantity for which a commodity can be sold and purchased in an economy. When market equilibrium is achieved, it suggests that all resources have been allocated efficiently and that there is just a distribution of income and resources in the economy. Video Formula

Chapter 18, Problem 7PA

Subpart (a):

To determine

The Investment and the loanable fund market of the economy.

Subpart (a):

Expert Solution

Explanation of Solution

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.

When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:

ReturnsHarry=Investment×(1+Interest rate)=1,000×(1+0.05)=1,000×1.05=1050

Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:

ReturnsRon=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, Ron will have $1,080 after one year.

ReturnsHermione=Investment×(1+Interest rate)=1,000×(1+0.20)=1,000×1.20=1200

Thus, Hermione will have $1,200 after one year.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (b):

To determine

The Investment and the loanable fund market of the economy.

Subpart (b):

Expert Solution

Explanation of Solution

When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (c):

To determine

The Investment and the loanable fund market of the economy.

Subpart (c):

Expert Solution

Explanation of Solution

When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the rate of return of 6 percent with the rate of interest, the rate of interest is higher. On the other hand, the rate of returns of Ron and Hermione is higher than the rate of interest of 7 percent and they both would like to borrow. So, the quantity of loanable funds demanded will be $2,000, while quantity of loanable funds supplied will be equal to $1,000.

When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (d):

To determine

The Investment and the loanable fund market of the economy.

Subpart (d):

Expert Solution

Explanation of Solution

The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund market equilibrium and thus the quantity demanded and supplied in the loanable fund market will be $1,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (e):

To determine

The Investment and the loanable fund market of the economy.

Subpart (e):

Expert Solution

Explanation of Solution

When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:

ReturnsRon & Harry=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:

ReturnsHermione=[Investment×(1+Interest rate)]−[Borrowed money×(1+Interest rate)]=[2,000×(1+0.20)]−[1,000×(1+0.08)]=(2,000×1.20)−(1,000×1.08)=2400−1080=1320

Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 18, Problem 7PA

Subpart (a):

To determine

The Investment and the loanable fund market of the economy.

Subpart (a):

Expert Solution

Explanation of Solution

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.

When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:

ReturnsHarry=Investment×(1+Interest rate)=1,000×(1+0.05)=1,000×1.05=1050

Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:

ReturnsRon=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, Ron will have $1,080 after one year.

ReturnsHermione=Investment×(1+Interest rate)=1,000×(1+0.20)=1,000×1.20=1200

Thus, Hermione will have $1,200 after one year.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (b):

To determine

The Investment and the loanable fund market of the economy.

Subpart (b):

Expert Solution

Explanation of Solution

When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (c):

To determine

The Investment and the loanable fund market of the economy.

Subpart (c):

Expert Solution

Explanation of Solution

When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the rate of return of 6 percent with the rate of interest, the rate of interest is higher. On the other hand, the rate of returns of Ron and Hermione is higher than the rate of interest of 7 percent and they both would like to borrow. So, the quantity of loanable funds demanded will be $2,000, while quantity of loanable funds supplied will be equal to $1,000.

When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (d):

To determine

The Investment and the loanable fund market of the economy.

Subpart (d):

Expert Solution

Explanation of Solution

The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund market equilibrium and thus the quantity demanded and supplied in the loanable fund market will be $1,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Subpart (e):

To determine

The Investment and the loanable fund market of the economy.

Subpart (e):

Expert Solution

Explanation of Solution

When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:

ReturnsRon & Harry=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:

ReturnsHermione=[Investment×(1+Interest rate)]−[Borrowed money×(1+Interest rate)]=[2,000×(1+0.20)]−[1,000×(1+0.08)]=(2,000×1.20)−(1,000×1.08)=2400−1080=1320

Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 6

Chapter 18, Problem 7PA

Subpart (a):

To determine

The Investment and the loanable fund market of the economy.

Subpart (a):

Expert Solution

Explanation of Solution

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.

When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:

ReturnsHarry=Investment×(1+Interest rate)=1,000×(1+0.05)=1,000×1.05=1050

Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:

ReturnsRon=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, Ron will have $1,080 after one year.

ReturnsHermione=Investment×(1+Interest rate)=1,000×(1+0.20)=1,000×1.20=1200

Thus, Hermione will have $1,200 after one year.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 7

Chapter 18, Problem 7PA

Subpart (a):

To determine

The Investment and the loanable fund market of the economy.

Answer 8

Subpart (a):

Expert Solution

Explanation of Solution

Investment is an asset or an item purchased today in the hope that it will generate income in the future. In that sense, the spending of capital on the purchase of new physical capitals refers to the equipment and the buildings and so forth.

When there is no possibility of loanable fund market between the students and each have to invest their own amounts, then each of the students will have the following returns after one year:

ReturnsHarry=Investment×(1+Interest rate)=1,000×(1+0.05)=1,000×1.05=1050

Thus, Harry will have $1,050 after one year. Similarly, the returns of Ron and Hermione can be calculated as follows:

ReturnsRon=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, Ron will have $1,080 after one year.

ReturnsHermione=Investment×(1+Interest rate)=1,000×(1+0.20)=1,000×1.20=1200

Thus, Hermione will have $1,200 after one year.

Answer 9

Subpart (a):

Expert Solution

Answer 10

Subpart (a):

Expert Solution

Answer 11

Expert Solution

Answer 12

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 13

Subpart (b):

To determine

The Investment and the loanable fund market of the economy.

Subpart (b):

Expert Solution

Explanation of Solution

When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 14

Subpart (b):

To determine

The Investment and the loanable fund market of the economy.

Answer 15

Subpart (b):

Expert Solution

Explanation of Solution

When there is a loanable fund market between the students at the rate of interest 'r', each student will compare the rate of their return with the rate of interest in the loanable fund market for loanable funds, which is 'r'. When the rate of returns is higher than the rate of interest, the student would borrow and if it is lower than the interest rate, then the student will lend.

Answer 16

Subpart (b):

Expert Solution

Answer 17

Subpart (b):

Expert Solution

Answer 18

Expert Solution

Answer 19

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 20

Subpart (c):

To determine

The Investment and the loanable fund market of the economy.

Subpart (c):

Expert Solution

Explanation of Solution

When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the rate of return of 6 percent with the rate of interest, the rate of interest is higher. On the other hand, the rate of returns of Ron and Hermione is higher than the rate of interest of 7 percent and they both would like to borrow. So, the quantity of loanable funds demanded will be $2,000, while quantity of loanable funds supplied will be equal to $1,000.

When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 21

Subpart (c):

To determine

The Investment and the loanable fund market of the economy.

Answer 22

Subpart (c):

Expert Solution

Explanation of Solution

When the rate of interest is 7 percent, Harry would want to lend the money with him because when he compares the rate of return of 6 percent with the rate of interest, the rate of interest is higher. On the other hand, the rate of returns of Ron and Hermione is higher than the rate of interest of 7 percent and they both would like to borrow. So, the quantity of loanable funds demanded will be $2,000, while quantity of loanable funds supplied will be equal to $1,000.

When the rate of interest increases to 10 percent, both Harry and Ron would turn out to be lenders because their rate of return is lower than the rate of interest but Hermione would still be the borrower, since the rate of return is higher than the rate of interest. Here, the quantity of loanable funds demanded is $1,000 and quantity of loanable funds supplied is $2,000.

Answer 23

Subpart (c):

Expert Solution

Answer 24

Subpart (c):

Expert Solution

Answer 25

Expert Solution

Answer 26

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 27

Subpart (d):

To determine

The Investment and the loanable fund market of the economy.

Subpart (d):

Expert Solution

Explanation of Solution

The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund market equilibrium and thus the quantity demanded and supplied in the loanable fund market will be $1,000.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 28

Subpart (d):

To determine

The Investment and the loanable fund market of the economy.

Answer 29

Subpart (d):

Expert Solution

Explanation of Solution

The loanable fund market will be in equilibrium when the quantity of loanable funds demanded and supplied in the market becomes equal. At 8 percent rate of interest, Harry would like to lend and Hermione would like to borrow. Ron would use his own savings to invest because the rate of interest and rate of return to him is equal and he would not like to lend or borrow. Thus, the quantity of loanable fund supplied will become $1,000 by Harry and that which was demanded will also become $1,000 by Hermione. This would make the loanable fund market equilibrium and thus the quantity demanded and supplied in the loanable fund market will be $1,000.

Answer 30

Subpart (d):

Expert Solution

Answer 31

Subpart (d):

Expert Solution

Answer 32

Expert Solution

Answer 33

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 34

Subpart (e):

To determine

The Investment and the loanable fund market of the economy.

Subpart (e):

Expert Solution

Explanation of Solution

When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:

ReturnsRon & Harry=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:

ReturnsHermione=[Investment×(1+Interest rate)]−[Borrowed money×(1+Interest rate)]=[2,000×(1+0.20)]−[1,000×(1+0.08)]=(2,000×1.20)−(1,000×1.08)=2400−1080=1320

Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.

Economics Concept Introduction

Concept introduction:

Investment: It is an asset or an item purchased today in the hope that it will generate income in the future.

Answer 35

Subpart (e):

To determine

The Investment and the loanable fund market of the economy.

Answer 36

Subpart (e):

Expert Solution

Explanation of Solution

When the rate of interest in the economy is 8 percent, Ron will use his own capital stock and Harry would lend the amount with him. Thus, both of them will earn the same rate of return which is 8 percent. This can be calculated as follows:

ReturnsRon & Harry=Investment×(1+Interest rate)=1,000×(1+0.08)=1,000×1.08=1080

Thus, both of them would earn $1,080. So, the lender Harry would earn $30 higher than without lending a return to him. In the case of Hermione, he will borrow $1,000 from Harry and would invest but he has to repay the $1,000 and its 8 percent interest to Ron. Thus, the returns to Hermione can be calculated as follows:

ReturnsHermione=[Investment×(1+Interest rate)]−[Borrowed money×(1+Interest rate)]=[2,000×(1+0.20)]−[1,000×(1+0.08)]=(2,000×1.20)−(1,000×1.08)=2400−1080=1320

Thus, Hermione will have a return of $1,320 which is $120 higher than no loanable fund market. Thus, since the borrower and lender are better off in the economy, no one is worse off.