Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 8, Problem 6PA
Subpart (a):
To determine
The impact of the interest rate on investment.
Subpart (b):
To determine
The impact of the interest rate on investment.
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Suppose that Intel is considering building a new chip-making factory a. Assuming that Intel needs to borrow money in the bond market, why would an increase in interest rates affect Intel’s decision about whether to build the factory?
b. If Intel has enough of its own funds to finance the new factory without borrowing, would an increase in interest rates still affect Intel’s decision about whether to build the factory? Explain!
Suppose that Intel is considering building a new chip-making factory.
Assume that Intel needs to borrow money in the bond market. It is less likely for Intel to build the new factory if interest rates
True or False: If Intel has enough of its own funds to build the new factory without borrowing, an increase in interest rates would not affect Intel's
decision about whether to build the factory.
True
False
1. A group of college friends decide to start their own bank, LSU Community Bank, in rural
Pennsylvania. In order to get started they put in a total of $10 million of their own money and
borrow $40 million from a venture debt lender. (This is known as venture debt lending.)
They accept $ 160 million in deposits from households and businesses in the community, and, in
turn, make $ 90 million in loans. They also purchase $ 95 million of mortgage-backed securities
and keep the remainder of their assets as reserves at the Philadelphia Federal Reserve District
Bank.
a. Show LSU Community Bank's balance sheet.
b.
What is LSU Community Bank's reserve-deposit ratio?
What is LSU Community Bank's asset to equity ratio?
C.
Chapter 8 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
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Similar questions
- (1) Suppose you just bought a treasury bill for $965 that matures in three months (91 days), and has a face value of $1,000. What is your bond’s current discount yield? What is your bond’s current investment yield? ANS: (2) The French Government runs a budget surplus to finance its expenditure. Use the loanable funds model to show what happens to the interest rate, investments, and the quantity of loanable funds. ANS: (3) Which of the following is money? An American Express traveler’s check Checking deposits at Washington Mutual bank. The check you have just written to pay for school fees. ANS:arrow_forwardExplain why a firm with $1 billion in the bank would care about the market interest rate when investing $10 million into a new building, after all they do not need to borrow money. When would the choose to undertake this investment project?arrow_forwardb. Using the loanable funds theory, explain what will happen to the real equilibrium interest rate under the following scenarios: (In your discussion describe or show with a graph the change in the supply curve for loanable funds and the change in its intersection with the demand curve for loanable funds). (1) The U.S. Federal Reserve engages in an open market expansion policy to increase the money supply to speed up the economy. (2) The U.S. government has a larger demand for funds to fund a large deficit, so will be seeking to borrow loanable funds by issuing a large amount of new government bonds to sell to the public. (3) There is an expansion, and businesses are expanding and increasing their plans to take on new capital projects, increasing their demand for financing. (4) Wealth and liquidity rises in an economy, resulting in investors and savers more willing to invest/lend funds in an economy.arrow_forward
- Consider a period in which stock prices are very high, such that investors begin to think that stocks are overvalued, and their valuations are very uncertain. If investors decide to move their money into much safer investments, would this affect general interest rate levels? In your answer, use the loanable fund's framework to explain how the supply of or demand for loanable funds would be affected by the investor actions and how this force would affect interest ratesarrow_forwardFor each of the following pairs, which bond wouldyou expect to pay a higher interest rate? Explain.a. a bond of the U.S. government or a bond of anEastern European governmentb. a bond that repays the principal in year 2020 or abond that repays the principal in year 2040c. a bond from Coca-Cola or a bond from a softwarecompany you run in your garaged. a bond issued by the federal government or abond issued by New York Statearrow_forwardThe graph below depicts the loanable funds market in the United States. The interest rate is measured in percent, and quantity is measured in billions of dollars. The supply curve, S₁, represents the savings by U.S. households. The demand curve, D₁, represents investment spending by U.S. firms on capital projects. 2 W S #3 80 E D S $ 4 888 R Interest Rate 15 Suppose the current interest rate is 5%. At this interest rate, there is an 12 OF 15 QUESTIONS COMPLETED F 15 14 13 12 11 10 F4 . 8 7 • 4 3 2 % 5 FS T Loanable Funds Market G MacBook Air ^ 6 Y & 7 H 152 D1 17 Quantity billions of dollars) U #00 * 8 of $ 11 16 이 J 4 1 9 billion. 19 K 0 O SUBMIT F10 Parrow_forward
- In the Loanable Funds Market Model, ceteris paribus, it typically follows that when the federal government runs a budget deficit, there will be préssure on interest rates and pressure on private investment. This is referred to as Select one: O a. upward; upward; crowding out Ob. upward; downward; crowding out O c. downward; downward; financial intermediation Od. downward; upward; financial intermediation.arrow_forwardChairman Latrobe, the Supreme Leader of Rolling Rock decided to increase the personal tax rate to fund the defense force. 8) How may this affect the loanable funds market? Explain by describing the change in the demand for, or the supply of, loanable funds. 9) Because of the change decreed by President Thug and your answer to question 8, what is likely to happen to the interest rate and the quantity of funds in the loanable funds market? 10) How will each of these Rolling Rockers feel about President Thug’s decision? (A) Investor Confidence (B) The President of Rolling Rock National Bankarrow_forwardYou invest $1,000 in stocks. Would a macroeconomist call this an investment? Why or why not? An economist would say no, because the minimum threshold for a stock purchase to be considered an investment is $10,000. yes, because there is a concensus amongst Wall St. that this is considered an investment. O yes, because you are purchasing something that may yield more value later. no, because you are just buying an existing asset without creating any new productive capacity in the economy.arrow_forward
- Draw the loanable funds market for 30-year fixed rate mortgages with the equilibrium rate at 5.13% and the equilibrium total amount of mortgages at $12.0 trillion. a> For the sake of simplicity, assume that mortgages are issued and financed through “banks” (I know some of you work in the mortgage, real estate, or finance industry and know the minute details of the mortgage market, but let’s just keep it simple). If people are willing to save more money in “banks,” how will this market be affected? (i.e., which curve(s) will shift, and in which direction?) b> What will happen to the equilibrium quantity of loans after the event in part a? What will happen to the equilibrium interest rate for 30-year fixed rate mortgages after the event in part a?arrow_forwardK In the figure to the right, the leftward shift from the demand for loanable funds curve DLF, to the demand for loanable funds curve DLF3, could be the result of O A. the economy entering a recession. B. the economy entering an expansion. O C. a decrease in interest rates during an economic recession. O D. a government budget surplus. O E. a increase in interest rates during an economic expansion. Real interest rate (percent per year) 10 8 6 4 2 0 DLF₁ DLF₂ DLF3 1.5 2.0 2.5 3.0 3.5 Loanable funds (trillions of 2005 dollars)arrow_forwardWhich of the following factors pose a limit on the ability of commercial banks to increase the quantity of money in circulation by extending new loans? Select one or more: a. the quantity of Central Bank reserves that they own b. the quantity of money that savers lent to them by opening deposits c. the behavior of households and firms, which reduce the quantity of money in circulation by repaying previous loans. d. the availability of profitable lending opportunities in the economy e. the willingness of household and firms to take up new debts at the given interest ratearrow_forward
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