1. Why is the financial system of a country important for long-run economic growth?
Why is it vital for economic growth that firms have access to adequate sources of funds? Explain
What is the most important factor in explaining increases in Real GDP per capita in the long-run?
What the two key factors cause labor productivity to increase over time?
2. What are loanable funds?
Why do businesses demand loanable funds?
Why do households supply loanable funds?
3. Consider the following data for closed economy (3 points)
Y = $11 trillion
C = $8 trillion
G= $2 trillion
Public saving = - $0.5 trillion
Taxes = $2 Trillion
Use the data to calculate the following: All underlying work must be shown
a. Private saving
b. Investment spending
c. Transfer payments
d. The government budget deficit or budget surplus
e. Suppose that government purchases increase from $2 trillion to $2.5 trillion. If the values of Y, C and T are unchanged,
How the values of S and I, will change? Explain verbally and illustrate numerically your answer
Use the market for loanable funds graph to illustrate your answer from above
4. Firms care about their after tax return on investment projects.
a. In the market for loanable funds, graph and explain the effect of an increase in business taxes on business profits (for simplicity, assume no change in the federal budget deficit or surplus) and demand for loanable funds
b. Explain what happens to the equilibrium real interest rate and quantity of loanable funds?
c. What will be the effect on the quantity of investments by firms and the economy’s capital stock in the future?
d. How the future and economic growth will be affected? Explain