Question

Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the students’ investment projects:
Student Return
(Percent)
Yakov 4
Charles 7
Dina 15
Assume borrowing and lending is prohibited, so each student uses only personal saving to finance his or her own investment project.
Complete the following table with how much each student will have a year later when the project pays its return.
Student Money a Year Later
(Dollars)
Yakov _________
Charles _________
Dina _________
Now suppose their school opens up a market for loanable funds in which students can borrow and lend among themselves at an interest rate rr.
If a student’s expected rate of return is greater than r, he or she would choose to (lend, borrow).
Suppose the interest rate is 6 percent.
Among these three students, the quantity of loanable funds supplied would be $______, and quantity demanded would be $______.
Now suppose the interest rate is 12 percent.
Among these three students, the quantity of loanable funds supplied would be $______, and quantity demanded would be $______.
At an interest rate of ______% , the loanable funds market among these three students would be in equilibrium. At this interest rate, (Charles, Yakov, Yakov and Charles, Charles and Dina, Dina) would want to borrow, and (Charles, Yakov, Yakov and Charles, Charles and Dina, Dina) want to lend.
Suppose the interest rate is at the equilibrium rate.
Complete the following table with how much each student will have a year later after the investment projects pay their return and loans have been repaid.
Student Money a Year Later
(Dollars)
Yakov _________
Charles _________
Dina _________
True or False: Only borrowers are made better off, and lenders are made worse off.

Answer 1

Answer:

Complete the following table with how much each student will have a year later when the project pays its return.

Student Money a Year Later

Yakov $1,040

Charles $1,070

Dina $1,150

Now suppose their school opens up a market for loanable funds in which students can borrow and lend among themselves at an interest rate r.

If a student’s expected rate of return is greater than r, he or she would choose to (lend, borrow).

Suppose the interest rate is 6 percent.

Among these three students, the quantity of loanable funds supplied would be $1,000, and quantity demanded would be $2,000.

Now suppose the interest rate is 12 percent.

Among these three students, the quantity of loanable funds supplied would be $2,000, and quantity demanded would be $1,000.

At an interest rate of 7%, the loanable funds market among these three students would be in equilibrium.

At this interest rate, Yakov would want to borrow, and Dina want to lend.

Suppose the interest rate is at the equilibrium rate.

Complete the following table with how much each student will have a year later after the investment projects pay their return and loans have been repaid.

Student Money a Year Later

(Dollars)

Yakov $1,070

Charles $1,070

Dina $1,230

True or False: Only borrowers are made better off, and lenders are made worse off.