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Loanable Funds, Bond Valuation, Efficient Markets, and Corporate Governance, Assignments of Economic policy

Emory UniversityEconomic policy

Econ 400 at Emory University by Dr. Luo

Typology: Assignments

2020/2021

Uploaded on 03/17/2022

carrick-zhu
carrick-zhu 🇺🇸

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ECON 411 Problem Set 2
Dr. Luo
Carrick Zhu
09/28/2021
1. [Q.1 in Chapter 4] 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 computer 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.
pf3
pf4

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ECON 411 Problem Set 2 Dr. Luo Carrick Zhu 09/28/

  1. [Q.1 in Chapter 4] 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 computer 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.

  1. [Q.10 in Chapter 4] Suppose a Treasury bond costs $100 and promise a payment of $105 in a year. A bond from the Acme Corporation costs $100 and promises $107 in a year. Assume that Acme pays the $107 with probability p. With probability 1−p, Acme defaults and pays nothing. What are likely values of

regulation requiring chairs at mutual funds to be independent of management, forcing Johnson to resign as chair. Johnson opposed the SEC action. Here are two arguments he made: (a) “Mandating an independent chairperson is akin to requiring that every ship have two captains. ... If a ship I was sailing on were headed for an iceberg, I’d want one – and only one - captain giving orders. I’d like to know that he’d spent some time at sea and knew what he was doing.” (b) “If a wrong-doer is tempted to try some abuse against fund shareholders, which board chairman would they rather try sneaking it past - an industry veteran with a direct and personal interest in the fund - or a chairman with 40 years experience making carbonated beverages, and who has just flown in for a two-day boarding meeting?” Summarize Johnson’s arguments against independent chairs in your own words. Also suggest responses that might be made by a supporter of the SEC regulation. In the first argument, John believed that having one experienced person who oversees two different positions would prevent the wrongdoers and make the company easier to avoid those problems. In the second argument, John believed that experience is more important for mutual funds so that he can make the right decision. However, the SEC supporter can counter Johnson’s arguments by saying that if there is only one person for two positions and he makes a mistake, there would be no one to stop him.