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Spring Term 2017
Yaşar University
Introduction to Economics II (Econ 102)
Problem Sheet 4
Saving, investment, the financial system
What are the basic differences between bonds and stocks?
Identify each of the following acts as representing either saving or investment.
Fred uses some of his income to buy government bonds.
Julie takes some of her income and buys mutual funds.
Alex purchases a new truck for his delivery business using borrowed funds.
Henrietta hires a builder to construct a new home using borrowed funds.
In the national income accounting identity showing the equality between national saving
and investment, what is the representation of private saving and what is the representation
of public saving?
Suppose the following values are from the National Income Accounts of a country. Output in
a closed economy is $6000, consumption is $4000, government spending $1200 and taxes are
$1000, and no transfer payments are made.
What is the value of saving and investment in this country?
What is the value of private saving?
What is the value of public saving?
Is the government’s budget policy contributing to growth in this country or
harming it? Why?
Why don’t countries reduce their budget deficits?
Australia has recently implemented a national sales tax. If they use the proceeds from this
tax to reduce income tax rates, what happens in the loanable funds market?
The model of the market for loanable funds shows that an investment tax credit will cause
interest rates to rise and investment to rise. Yet we also suppose that higher interest rates
lead to lower investment. How can these two conclusions be reconciled?
Using a graph representing the market for loanable funds, show and explain what happens
to interest rates and investment if a government goes from a deficit to a surplus.