# You are given the following information for the equations fo

You are given the following information for the equations for investment demand, private saving, the government's budget deficit, and natural real GDP: Id=2400-125r, S=1760+75r, T-G=-360, and Yn=12000. Suppose that this is a closed economy. the equilibrium interest rate is the one at which national saving and investment demand are equal. (a) Derive the equation for national saving. Compute the government's budget deficit as a percent of natural real GDP. (b) compute the equilibrium interest rate. compute the amounts of investment demand, private saving, and national saving at the equilibrium interest rate. (c) Suppose that fiscal policymakers cut the government's budget deficit to 1 percent of natural Real GDP. calculate the new amound of the government's budget deficit. derive the new equation for national saving. Compute the new equilibrium interest rate. Compute the amounts of investment demand, private saving, and national saving as the new equilibrium interest rate.

Given the information from the problem above, assume a small open economy and that the foreign interest rate is 4.6 percent. (a) compute the amounts of investment demand, private saving, national saving, net exports, and net foreign borrowing at the foreign interest rate. Suppose that fiscal policy makers cut the government's budget deficit. Compute the new amounts of investment demand, private saving, national saving, and net exports. Is the economy now borrowing from the rest of the world or lending to the rest of the world? Suppose that instead of a small open economy, we have a large open economy, and that initially the domestic and foreign interest rate is 4.6 percent. Again, fiscal policy makers cut the government's budget deficit to 1 percent of natural real GDP. As a result, the domestic and foreign interest rates decline to 4.2 percent. Compute the new amounts of investment demand, private saving, the government's budget deficit, national saving, net exports, and either foreign borrowing or foreign lending at the new domestic and foreign interest rates.

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You are given the following information for the equations for investment demand, private saving, the government's budget deficit, and natural real GDP: Id=2400-125r, S=1760+75r, T-G=-360, and Yn=12000. Suppose that this is a closed economy. the equilibrium interest rate is the one at which national saving and investment demand are equal.

(a) Derive the equation for national saving. Compute the government's budget deficit as a percent of natural real GDP.

National Savings = Private Savings + (T-G)

= 1,760 + 75r + (-360)

= 1400 + 75 r

The above is the equation for National Savings.

Budget Deficit/National Real GDP = 360/12000 = 3%

(b) compute the equilibrium interest rate. compute the amounts of investment demand, private saving, and national saving at the equilibrium interest rate.

The equilibrium interest rate is the one at which national savings and investment demands are equal.

1400 + 75 r = 2400 -125 r

Or, 200 r = 1000

Or, r = ...

#### Solution Summary

The solution provides detailed calculations and explanations for the macroeconomic problem.

Study Questions for Exam

1. Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17, E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.

a. Calculate the expected return and standard deviation of a portfolio that is composed fo 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

b. Calculate the standard deviation of a portfolio that is composed of 35% A and 65% B when the correlation coefficient between the returns on A and B is -0.6.

c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

2. Suppose the expected return on the market portfolio is 14.7% and the risk-free rate is 4.9%. MadeUp Company, Inc. stock has a beta of 1.3 (Assume the capital-asset-pricing model holds):

a. What is the expected return on the company's stock?

b. If the risk-free rate decreases to 3.7%, what is the expected return on the company's stock?

3. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22% and a standard deviation of 5%. The risk-free rate is 4.9%, and the expected return on the market portfolio is 19%. (Assume the capital-asset-pricing model holds): What expected rate of return would a security earn if it had a 0.6 correlation with the market portfolio and a standard deviation of 3%?

a. What financial concept or principle is the problem asking you to solve?

b. In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?

c. Is there any additional information missing from the problem that would enhance the decision-making process?

d. Without showing mathematical calculations, explain in writing how you would solve the problem.

4. Suppose you have invested $50,000 in the following 4 stocks:

Security Amount Invested Beta

Stock A $10,000 0.7

Stock B $15,000 1.2

Stock C $12,000 1.4

Stock D $13,000 1.9

The risk-free rate is 5% and the expected return on the market portfolio is 18%.

Based on the capital-asset-pricing model, what is the expected return on the above portfolio?

a. What financial concept or principle is the problem asking you to solve?

b. In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?

c. Is there any additional information missing from the problem that would enhance the decision-making process?

d. Without showing mathematical calculations, explain in writing how you would solve the problem.

5. You enter into a forward contract to buy a 10-year, zero-coupon bond that will be issued in 1 year. The face value of the bond is $1,000, and the 1-year and 11-year spot interest rates are 4% per annum and 9% per annum, respectively. Both of the interest rates are expressed as effective annual yields (EAYs). What is the forward price of your contract? Suppose both the spot rates unexpectedly shift downward by 1%. What is the price of a forward contract otherwise identical to yours?

a. What financial concept or principle is the problem asking you to solve?

b. In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?

c. Is there any additional information missing from the problem that would enhance the decision-making process?

d. Without showing mathematical calculations, explain in writing how you would solve the problem?

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