Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 18, Problem 7DQ
To determine
Economic functions of the interest rate.
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The Atlantic Investment Tax Credit is a 10% tax credit
available to businesses that make specific investments in
the Atlantic region and the Gaspe Peninsula. The graph
shows the market for loanable funds.
Show the impact of this tax credit by moving the proper
curve appropriately in the graph.
The new equilibrium interest rate is
The quantity of loanable funds is $
1
Incorrect
5
Incorrect
I
billion
Which statement accurately describes the impact of
the Atlantic Investment Tax Credit?
%
Firms find that more investments are profitable and
increase their demand for loanable funds. As a
result, the interest rate rises.
Interest rate (%)
10
10
3
2
0
0
5
10 15 20 25 30 35
Quantity of loanable funds (in billions)
40
Supply
45
Demand
50
Manipulate the graph to show what will happen to supply and
demand in the market for loanable funds when the
government budget deficit increases, changing the
equilibrium quantity of loanable funds by 3
percentage points.
Ceteris paribus, what is the new interest rate?
interest rate:
Ceteris paribus, private investment would
increase.
not change.
decrease.
%
20
10
9
Supply
8
Interest rate (%)
7
CO
5
LO
3
2
1
0
0
2
Demand
4 6 8 10 12 14 16 18 20 22 24 26 28
Quantity of loanable funds (% of GDP)
QUESTION 19
You lend your sister's daughter $2,000 for a year, if at the end of the year she pays you $2,180. The interest rate you are charging her is
O 1.1%.
O 9%.
O 10%.
O 20%.
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- The following table shows the average nominal interest rates on six-month Treasury bills between 1971 and 1975, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1971 to 1975. (All rates are rounded to the nearest tenth of a percent.) Nominal Interest Rate Inflation Rate Year (Percent) (Percent) 1971 4.5 4.2 1972 4.5 3.3 1973 7.2 6.3 1974 8.0 11.0 1975 6.1 9.1 Source: "FRED Economic Data," Federal Reserve Bank of St. Louis, last modified September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org. On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 1971 to 1975. Next, use the green points (triangle symbol) to plot the real interest rates for those years. 8.0 7.0arrow_forwardSuppose you net investment at time t (measured in years) is given (in pounds) by I(t) = 500 – 200 | x+1 Which of the following best represents the capital generated between the end of the 2nd year and the end of the 5th year? O a. a. £1361.37 O b. £1678.11 O c. £1544.03 O d. £1242.78arrow_forwardIf the discount rate on 3-month commercial paper is 4.9% while the yield on 3-month CDs is 5%, the real difference between them in basis points (in terms of yield) is: (You may need to look up how many basis points there are in a percentage point) Select one: a. 39 O b. 0.39 O c. 0.1 O d. 10 O e. 3.9arrow_forward
- An individual buys $11,000 of stock. The stock grows by 6 percent each year. Calculate the final value after taxes if the individual holds the stock for 2 years. Assume that only half of realized capital gains is taxable and that the tax rate is 40 percent. The individual sells the stock at the end of the 2 years. What is the final value of the stock after taxes, rounded to the nearest dollar? O $12,088 O $11,400 O $9,888 O $1,816 O $1,680arrow_forwardSuppose that the demand for loanable funds for car loans in the Milwaukee area is $12 million per month at an interest rate of 1O percent per year, $13 million at an interest rate of 9 percent per year, $14 million at an interest rate of 8 percent per year, and so on. If the supply of loanable funds is fixed at $15 million, what will be the equilibrium interest rate? Instructions: Enter your answer as a whole number. percent per yeararrow_forwardO If the market interest rate (i) increases today, the Price of a Bond (P) today will decline. The following are correct statements about the impact of Market Interest Rate (i*) on value and return of a typical Coupon Bond, EXCEPT: The YTM of a Bond and the Market Interest Rate (i*) are the same value, even in the Short Term. O For a long term bond, if the Market Interest rate (i*) is expected to increase, the current Price of such Bond will Decline. For a two period Bond, if the Market Interest rate (i*) is expected to increase in the next period, the Expected Total Return (RET) on such bond will decline. Long Term Bonds are considered more risky than Short Term bonds, in part due to the risk associated to changes in future interest rates.arrow_forward
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