loanable funds theory

Using the loanable funds theory, show in a graph how each of the following events affects the supply and demand for loans and the equilibrium real interest rate:

a. A war leads the government to increase spending on the military. (Assume taxes do not change.)

b. Wars in other countries lead to higher government spending in those countries.

c. Someone invents a new kind of compu – ter that makes firms more productive. Many firms want to buy the computer. Higher productivity also increases people’s confidence in the economy, so consumers see less need to save.

d. The same things happen as in part (c). In addition, increased confidence in the economy raises net capital inflows.

loanable funds theory

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real interest rate

Suppose the real interest rate rises. Using the loanable funds theory, discuss whether this event is likely to reflect good economic news or is a sign of trouble.

real interest rate

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interest rates

Comment on this statement: “People care about real interest rates, not nominal rates. Therefore, money demand should depend on the difference between the real rates on money and bonds, not the nominal rate on bonds.”

interest rates

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liquidity preference theory

Suppose that discount brokers make bonds more liquid. It becomes quick and inexpensive to sell bonds. In the liquidity preference theory, how does this development affect money demand and the interest rate?

liquidity preference theory

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interest rate

Suppose again that discount brokers make bonds more liquid. What should the central bank do if it doesn’t want the interest rate to change? Explain your answer.

interest rate

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interest rate

Suppose it is 2020, the 1-year interest rate is 8 percent, and the 10-year rate is 6 percent.

a. Draw a graph showing a likely path of the 1-year rate from 2020 through 2029.

b. Why might people expect such a path for the 1-year rate?

interest rate

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expectations theory

Using the expectations theory without term premiums, derive a formula giving the 4-year interest rate in 2020 as a function of 2-year rates in 2020 and the future.

expectations theory

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interest rates

Suppose that some event has no effect on expected interest rates, but raises uncertainty about rates. What happens to the yield curve? Explain.

interest rates

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random thermal velocity

The conductivity of copper is approximately 6 X 105 mho /cm at room temperature and is due to the mobility of electrons (one per atom) free to move under the influence of an electric field. The concentration of these conduction electrons is approximately 1023 cm-3.

(a)Calculate the electron mobility in copper at room temperature. How does this compare with Si and Ge?

(b) Calculate the net average velocity of the electrons in the direction of the current flow (assume it is thex-direction) in a 0. 1-mm2 cross-sectional area wire carryinga current of 1 A. [Assume that the current is due to the cooperative motion of the electrons (“drift”) superimposed on their random thermal velocity (which by itself does not lead to any net current).]

random thermal velocity

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constant electric field

Simplify the five equations in the special case of uniform material with no optical excitation and with a uniform, constant electric field within the sample, and show that they reduce to Eq. (3.12).

constant electric field

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