Answer:
Student Money a Year Later:
Harry = Money saved + student return * money saved = $1000 + (5% * 1000) = $1050
Ron = Money saved + student return * money saved = $1000 + (8% * 1000) = $1080
Hermione = Money saved + student return * money saved = $1000 + (20% * 1000) = $1200
Explanation:
a) Student Money a Year Later:
Harry = Money saved + student return * money saved = $1000 + (5% * 1000) = $1050
Ron = Money saved + student return * money saved = $1000 + (8% * 1000) = $1080
Hermione = Money saved + student return * money saved = $1000 + (20% * 1000) = $1200
b) A student would choose to be a borrower in this market if his or her expected rate of return is greater than the interest rate and lends if his or her expected rate of return is less than the interest rate
c) If interest = 7%, Harry would want to lend while Ron and Hermione would want to borrow. The quantity of funds demanded would be $2,000, while the quantity supplied would be $1,000. If interest = 10%, only Hermione would want to borrow. The quantity of funds demanded would be $1,000, while the quantity supplied would be $2,000.
d) At an interest rate of 8%, the loanable funds market among these three students would be in equilibrium. At this interest rate Hermione would want to borrow, and Harry would want to lend.
e) At equilibrium:
Harry = $1000 + (8% * 1000) = $1080
Ron = $1000 + (8% * 1000) = $1080
Hermione = $2,000(1 + 0.20) – $1,000(1 + 0.08) = $2,400 – $1,080 = $1,320
Both borrowers and lenders are better off. No one is worse off
