The document contains tutorial questions related to Chapter 13 of an Introduction to Macroeconomics course, focusing on saving, investment, and the financial system. It covers topics such as the differences between bonds and stocks, interest rates, recommendations for bond investments based on risk tolerance, and the implications of financial decisions on investments. Additionally, it includes questions about national income accounting, loanable funds market dynamics, and the effects of government fiscal policies on interest rates and investment.
The document contains tutorial questions related to Chapter 13 of an Introduction to Macroeconomics course, focusing on saving, investment, and the financial system. It covers topics such as the differences between bonds and stocks, interest rates, recommendations for bond investments based on risk tolerance, and the implications of financial decisions on investments. Additionally, it includes questions about national income accounting, loanable funds market dynamics, and the effects of government fiscal policies on interest rates and investment.
The document contains tutorial questions related to Chapter 13 of an Introduction to Macroeconomics course, focusing on saving, investment, and the financial system. It covers topics such as the differences between bonds and stocks, interest rates, recommendations for bond investments based on risk tolerance, and the implications of financial decisions on investments. Additionally, it includes questions about national income accounting, loanable funds market dynamics, and the effects of government fiscal policies on interest rates and investment.
The document contains tutorial questions related to Chapter 13 of an Introduction to Macroeconomics course, focusing on saving, investment, and the financial system. It covers topics such as the differences between bonds and stocks, interest rates, recommendations for bond investments based on risk tolerance, and the implications of financial decisions on investments. Additionally, it includes questions about national income accounting, loanable funds market dynamics, and the effects of government fiscal policies on interest rates and investment.
Tutorial 4 - Ch.13 Saving, Investment, and the Financial System - Questions
1. What are the basic differences between bonds and stocks?
2. Which of the two bonds in each example would you expect to pay the higher interest rate? Explain why. a. a U.S. government bond or a Brazilian government bond b. a U.S. government bond or a municipal bond of the same risk and term c. a 6-month Treasury bill or a 20-year bond d. a General Motors bond or a bond issued by a new record company
3. Suppose that you are a broker and people tell you the following about themselves. What sort of bond would you recommend to each? Defend your choices. a. “I am in a high federal income tax bracket and I don’t want to take very much risk.” b. “I want a high return and I am willing to take a lot of risk to get it.” c. “I want a decent return and I have enough deductions that I don’t value tax breaks highly.”
4. Your brother-in-law wants to buy either stock or bonds in Cedar Valley Furniture, but he isn’t sure whether to buy the stock or bonds. Explain how each of his quotes below should affect his choice between the stock and the bond. a. “I have reason to believe that people are soon going to find rocking chairs have health benefits.” b. “I would like to tell people I am part owner of Cedar Valley Furniture.” c. “I do not want to take on much risk.”
5. Suppose the Get Up Off of Your Butt exercise chain has revenues of $45 million, costs of $15 million, and currently has issued 10 million shares of stocks selling at $90 each. Compute the price to earning ratio. Show your work. Is this ratio relatively high or low? What might an increase in the price to earning ratio indicate?
6. In the national income accounting identity showing the equality between national saving and investment, what is the representation of private saving and what is the representation of public saving?
7. Identify each of the following acts as representing either saving or investment.
a. Fred uses some of his income to buy government bonds. b. Julie takes some of her income and buys mutual funds. c. Alex purchases a new truck for his delivery business using borrowed funds.
1 d. Elaine uses some of her income to buy stock in a major corporation, e. Henrietta hires a builder to construct a new home using borrowed funds.
8. Draw and label a graph showing equilibrium in the market for loanable funds.
9. Explain why the demand for loanable funds slopes downward and the supply of loanable funds slopes upward.
10. Australia has recently implemented a national sales tax. If they use the proceeds from this tax to reduce income tax rates, what happens in the loanable funds market?
11. The model of the market for loanable funds shows that an investment tax credit will cause interest rates to rise and investment to rise. Yet we also suppose that higher interest rates lead to lower investment. How can these two conclusions be reconciled?
12. Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if a government goes from a deficit to a surplus.
