Based on current information on the U.S. stock market and the debt markets, including interest rates: (a) would you recommend that a firm raise funds through borrowing or by issuing stock? (b) would you recommend that a household build wealth by investing in the stock market or in real estate? Explain your answers to a. and b.
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Based on current information on the U.S. stock market and the debt markets, including interest rates:
(a) would you recommend that a firm raise funds through borrowing or by issuing stock?
(b) would you recommend that a household build wealth by investing in the stock market or in real estate?
Explain your answers to a. and b.
Hint: You may begin with general information about current developments in the equity and debt markets, and the discuss how firms and households may use this information to make short-term and long-term financial decisions.
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- The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. NOTE: the first dropdown question options are (fall or rise), the seconds are (decrease or increase), the thirds are (fall or rise), the fourths are (fall or rise), the fifths are (deficit or surplus), the sixths are (decreases or increases), the sevenths are (fall or rise), and the last ones is (crowding out ot increasing)We would like you to identify a financial market and describe it using an economic approach. What are the goods exchanged? How is the supply set? How is the demand set? What are the constraints that are potentially preventing the market reaching an equilibrium? Examples of financial markets are stock markets, corporate bonds, derivatives, money market, sovereign bonds. We would then like you to reflect on how your new understanding of fundamental economic functions can apply or will apply to your professional experience. Identify a key area where you could apply this new knowledge and explain how it will help you to provide a better analysis of the economics forces at work.The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.) 14 INTEREST RATE (Percent) Demand Supply LOANABLE FUNDS (Billions of dollars) Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 18%. Now suppose there is a decrease in the tax rate on interest income, from 18% to 14%. Shift the appropriate curve on the graph to reflect this change. Demand Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment spending…
- Suppose that the graph below represents the market for financial capital in Palau. How does an increase in the budget deficit of Palau affect its equilibrium interest rate? Interest rate (%) Supply Demand Quantity of financial capital (% of GDP) The equilibrium interest rate increases since the supply curve for financial capital shifts to the left. The equilibrium interest rate decreases since the demand curve for financial capital shifts to the left. The equilibrium interest rate increases since the demand curve for financial capital shifts to the right. The equilibrium interest rate decreases since the supply curve for financial capital shifts to the right.Chairman 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 BankUse the following graph to show the effects on the Market for Loanable Funds of many people deciding to play the lottery rather than save money for retirement: Instructions: Drag the supply curve to illustrate the appropriate change in supply. Market for Loanable Funds Interest Rate 100 90 Supply (Savings) 80 70 60 50 Demand (Investment) 40 30 20 10 10 20 30 40 50 60 70 80 90 100 Dollar volume of Savings, Investment
- Suppose there is an increase in the interest rate in the financial markets. What effect will this have on income? Use a diagram to support your answer.The following graph shows the loanable funds market in the United States. It plots both the demand (D) for loanable funds and the supply (S) of loanable funds. At the current equilibrium, the government is operating with a balanced budget. Assume now that the financial industry is close to bankruptcy and the U.S. government decides to implement a bailout plan of several billion dollars without increasing taxes, causing a budget deficit. Show the effect of the budget deficit on the market for loanable funds by shifting the demand (D) curve, the supply (S) curve, or both. Based on this model, the budget deficit leads to (an increase/a decrease) in the level of investment and (an increase/a decrease) in the interest rate. Which of the following arguments might a supporter of a balanced budget make in defense of their position? Check all that apply. -An individual's share of the government debt represents only a small portion of his or her lifetime earnings. -A…In the summer of 2010, Congress passed a far-reaching financial reform bill to attempt to prevent another financial crisis like the one that happened in 2008-2009. We will consider two scenarios related to this bill. 18. In the first scenario, suppose that by requiring firms to comply with strict regulations, the bill increases the cost of investment. Draw a graph showing the consequences of this scenario on the market for loanable funds. What is the result? 19. Now consider the second scenario: Suppose that by requiring firms to comply with strict regulations, the bill increases confidence that savers have with the financial system, making them more likely to save their money there. Draw a graph showing the consequences of this scenario on the market for loanable funds. In this scenario, which curve shifts, and what are the results?
- For each of the given scenarios, use the graphs to (1) show what happens in the market for loanable funds and (2) help answer the questions that follow. Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at depository institutions. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. INTEREST RATE Market for Loanable Funds SA LOANABLE FUNDS This change causes savers to supply of loanable funds demanded, there is quantity of loanable funds demanded. DA | * ¢ ** ? loanable funds. Because the quantity of loanable funds supplied is now pressure on interest rates. This change in interest rates causes a(n) the quantity in theShows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $10 million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest rate shift makes intuitive sense.Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Which curve will shift: supply or demand? In which direction will the curve shift: right or left? (It may help to use a demand and supply diagram to conduct your analysis.) a. The number of people at the most common ages for home-buying decreases. b. Rents rise extremely rapidly. c. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans. d. Because of a threat of a war, people become uncertain about their economic future.The overall level of saving in the economy diminishes. e. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.
