(Study Plan 7.1)

Use the following information to work Problems 1

and 2.

Michael is an Internet service provider. On

December 31, 2009, he bought an existing business

with servers and a building worth $400,000. During

his first year of operation, his business grew and he

bought new servers for $500,000. The market value

of some of his older servers fell by $100,000.

1. What was Michael's gross investment, depreciation,

and net investment during 2010?

2. What is the value of Michael's capital at the end

of 2010?

3. Lori is a student who teaches golf on the weekend

and in a year earns $20,000 after paying her

taxes. At the beginning of 2010, Lori owned

$1,000 worth of books, CDs, and golf clubs and

she had $5,000 in a savings account at the bank.

During 2010, the interest on her savings account

was $300 and she spent a total of $15,300 on

consumption goods and services. There was no

change in the market values of her books, CDs,

and golf clubs.

a. How much did Lori save in 2010?

b. What was her wealth at the end of 2010?

First Call, Inc., is a cellular phone company. It plans

to build an assembly plant that costs $10 million if

the real interest rate is 6 percent a year. If the real

interest rate is 5 percent a year, First Call will build a

larger plant that costs $12 million. And if the real

interest rate is 7 percent a year, First Call will build a

smaller plant that costs $8 million.

6. Draw a graph of First Call's demand for loan able

funds curve.

7. First Call expects its profit from the sale of cellular

phones to double next year. If other things

remain the same, explain how this increase in

expected profit influences First Call's demand for

loan able funds.

Use the following table to work Problems 10 to 12.

The table shows an economy's demand for loanable

funds and the supply of loanable funds schedules,

when the government's budget is balanced.

Real Loanable Loanable

interest funds funds

rate demanded supplied

(percent per year) (trillions of 2005 dollars)

4 8.5 5.5

5 8.0 6.0

6 7.5 6.5

7 7.0 7.0

8 6.5 7.5

9 6.0 8.0

10 5.5 8.5

10. Suppose that the government has a budget surplus

of $1 trillion. What are the real interest rate,

the quantity of investment, and the quantity of

private saving? Is there any crowding out in this

situation?

11. Suppose that the government has a budget deficit

of $1 trillion. What are the real interest rate, the

quantity of investment, and the quantity of private

saving? Is there any crowding out in this situation?

12. Suppose that the government has a budget deficit

of $1 trillion and the Ricardo-Barro effect

occurs. What are the real interest rate and the

quantity of investment?