UNIT 4 – BU204 – MACROECONOMICS 1
Unit 4 Assignment Template: Savings, Investment Spending, and the Financial System
Name: ______________
BU204 Section Number: ______
Date: ______________
Assignment
This assignment addresses how the loanable funds market matches savers with borrowers and the impact of various market pressures on interest rates and money availability.
1. Explain how overall national savings relates to overall investment and why savings is always equal to investment.
(Enter response here.)
2. The following formulas are very important in macroeconomics:
1) Y = C + I + G + EX – IM
2) S = (Y – T – C) + (T – G)
Identify the components of each formula.
(Enter response here.)
Explain the relationship between the two formulas.
(Enter response here.)
3. Explain how changes in interest rates will affect the amount of money that people save.
(Enter response here.)
4. Explain how changes in interest rates and rates of return on various investment options will affect the amount of money that businesses are willing to invest to increase output.
(Enter response here.)
5. Explain how government tax revenue and government spending create either a budget surplus or budget deficit. How does that difference affect the market for loanable funds?
(Enter response here.)
6. Use the market for loanable funds shown in the accompanying diagram to answer the following questions for each of the three scenarios: What will the likely results be on: 1) quantity of money saved, 2) interest rates, and 3) additional business investment. For all scenarios, assume that there are no external controls on interest rates.
Description: A graph showing the supply, in a red straight line rising to the right, and demand, in a straight blue line descending to the right, for loanable funds with the market interest rates on the vertical axis and money available on the horizontal axis. Initial equilibrium is at 8% interest rate and 300 million dollars.
a. The government significantly increases its borrowing to fund its growing deficit.
(Enter response here.)
b. At any given interest rate, a significant number of middle-class consumers decide to use their credit cards to fund additional purchases. Assume no change in government borrowing.
(Enter response here.)
c. At any given interest rate, many major businesses become pessimistic about the future profitability of investment spending. Assume no change in government borrowing.
(Enter response here.)
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References:
Author. (Date.) Title. Source.
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