Bu204 Final Exam
Final Exam
Course & Section: BU204-04
Unit: 9
Date: May 18, 2012
Questions:
1. Define any key terms that you feel are important in answering the following question as they are defined in the textbook and explain, in your own words what those definitions mean, and then thoroughly analyze each of the following changes in the market for loanable funds to answer the these questions Use the diagrams below, resizing them as necessary, to illustrate your analysis in explaining what happens to private savings, private investment spending, and the rate of interest if the following events occur. Assume the economy is closed (no transactions are made with foreign countries).
a. The government reduces the size of its deficit to zero (10 points).
Loanable funds – funds received by the bank by depositors that do not have to be retained and are available to be loaned out. This is how banks create money.
Private savings – disposable income not spent on consumption
Private investment spending – buying of capital goods by private business (non-government spending)
Rate of interest – the amount charged/paid for the use of money, specifically money that is borrowed from a Lender (bank)
If the government reduces the size of its deficit to zero, the demand for loanable funds shifts to the left. The number of loans decrease and private investment increases because interest rates decrease. As more invest, private savings decrease.
[pic]
b. At any given interest rate, consumers decide to save more. Assume the budget balance is zero (10 points).
When the budget balance is zero, private savings increase. This increases the amount of loanable funds and is illustrated by a supply curve shift to the right. This also causes a reduction in interest rates and an increase in private investment spending.
[pic]
c. At any given interest rate, businesses become very
Course & Section: BU204-04
Unit: 9
Date: May 18, 2012
Questions:
1. Define any key terms that you feel are important in answering the following question as they are defined in the textbook and explain, in your own words what those definitions mean, and then thoroughly analyze each of the following changes in the market for loanable funds to answer the these questions Use the diagrams below, resizing them as necessary, to illustrate your analysis in explaining what happens to private savings, private investment spending, and the rate of interest if the following events occur. Assume the economy is closed (no transactions are made with foreign countries).
a. The government reduces the size of its deficit to zero (10 points).
Loanable funds – funds received by the bank by depositors that do not have to be retained and are available to be loaned out. This is how banks create money.
Private savings – disposable income not spent on consumption
Private investment spending – buying of capital goods by private business (non-government spending)
Rate of interest – the amount charged/paid for the use of money, specifically money that is borrowed from a Lender (bank)
If the government reduces the size of its deficit to zero, the demand for loanable funds shifts to the left. The number of loans decrease and private investment increases because interest rates decrease. As more invest, private savings decrease.
[pic]
b. At any given interest rate, consumers decide to save more. Assume the budget balance is zero (10 points).
When the budget balance is zero, private savings increase. This increases the amount of loanable funds and is illustrated by a supply curve shift to the right. This also causes a reduction in interest rates and an increase in private investment spending.
[pic]
c. At any given interest rate, businesses become very