Assignment: Economics Essay

1. Economists in Funlandia, a closed economy, deplete collected the following information roughly the economy for a particular yearEconomists also estimate that the investment function iswhere r is the provinces real interest send, expressed as a percentage. Calculate private preservation, public relieve, home(a) saving, investment, and the equilibrium interest rate. Please note national savings is not related to the interest rate, which actor that the supply curve for loanable funds is vertical. (15 points)Private Savings= Y-T-C thousand0-1500-6000= 2500Public Saving= T-G 1500-1700= -200National Saving= S=(Y-T-C)+(T-G)=(10000-1500-6000)+(1500-1700)= 2300 Investing= I=Y-C-G 10000-6000-1700= 2300Real interest rateI = 3,300-100r , 100r = 3,300-I100r = 3,300-2300 ( I=2300)100r = 1000100r/100 = 1000/100 (dividing it by 100)r = 102. In the summer of 2010, Congress passed a far-reaching fiscal improve to prevent another financial crisis like the one experienced in 2008-2009. Cons ider the following possibilities a. retrieve that, by requiring crockeds to comply with strict regulations, the bill change magnitudes the costs of investment. On a easily-labeled graph, show the consequences of the bill on the commercialise for loanable funds. Be sure to specify changes in the equilibrium interest rate and the level of saving and investment. What are the effects of the bill on long-run economic growth (recall higher investment would increase capital and capital per worker)? (7 points) i. The demand loanable would decline along with the equilibrium. The saving and investments will decline as wellhence giving the economy a lower rate for the future. ii.b. Suppose, on the other hand, that by effectively regulating the financial system, the bill increases savers confidence in the financial system. Show the consequences of the policy in this federal agency on a new graph, again noting changes in the equilibrium interest rate and the level of saving and investment . Again evaluate the effects on long run growth. (7 points) i. The supply of loanable funds would increase. The interest rate will decrease while the savings and investments will increase. Which will let the economy growth for the future, ii.Problems for Chapter 143. According to an old myth, Native Americans sold the island of Manhattan 400 years ago for $24. If they had access to a financial investment that yielded an interest rate of 7% per year, how much would they support today? (8 points) a. (1.07)400 x 24= $13.6 Trillion4. For each of the following kinds of amends, give an example of a behavior that can be called honorable hazard and another example of behavior that can be called adverse selection a. Medical policy (6 points)i. A sick person is more likely to utilise to medical insurance compared to a rosy person. Meaning its an adverse selection. A healthy person may get health insurance too but now he may less likely to take care of himself, this would be a moral hazar d. b. Car insurance (6 points)i. A risky driver is more likely to apply for car insurance, this would be an adverse selection. Or once a driver has insurance, they may be impulsive more reckless, this would be a moral hazrd.5. For each of the following pairs of link ups, which cling would you expect to pay a higher interest rate? Explain. (5 points each) a. A bond of the US government or a bond of an Eastern European government i. Eastern European because non-US bonds will include risk premiums and also have higher interest evaluate b. A bond that repays the principal in 2015 or a bond thatrepays the principal in 2040 i. 2040 because higher maturity requires higher interest rate. c. A bond from Coca-Cola or a bond from a software company that run in your garage i. The software company repayable to not being well known so it would be a higher interest rate. d. A bond issued by the federal government or a bond issued by the state of bare-assed York i. Definitely federal governme nt because they are not tax-exempted compared to municipal bonds6. When company executives buy and sell comport based on private information they obtain as part of their jobs, they are engaged in insider trading. a. Give an example of inside information that might be useful for buying or exchange stock. (6 points) i. Information on new products or any government involvement that may affect the firm b. Those who trade stocks based on inside information usually earn very high rates of return.Does this fact violate the efficient markets hypothesis? (6 points) i. Who does trade with inside information is not violating the efficient market hypothesis. The hypothesis includes all easy information about the future of the firm. Inside information is not available to the public meaning the price of the stock doesnt reflect this. c. Insider trading is illegal. Why do you mean that is? (5 points) i. Its illegal for sure due to the fact that it gives others an unfair advantage over everyone else who doesnt have access to this.7. Jamal has a utility function , where W is his wealth in millions of dollars and U is the utility that he obtains. a. Graph Jamals utility function. Is he risk averse? Explain. (7 points) i.1. He is risk averse because of his chances of get more money for more risk. b. In the final stage of a game show, the host offers Jamal a excerption between i. $4 million for sureii. A gamble that pays $1 million with 60% probability and $9 million with 40% probability Should Jamal pick picking i or choice ii? Hint evaluate the utility that Jamal would expect to receive in choice i and choice ii. Jamal would expect to receive utility in the amount of the weighted average of the possible outcomes, where the probabilities are the weights. (7 points)E(Utility) = 0.6*U(1000000) + 0.4*U(9000000) = 0.6*0 + 0.4*1 = 0.4Jamel should pick option one because he has a only 40% in grade to get the 9 million but it might not worth it because he could end up back at 1 million.