Book cover for Economics

Economics

Michael Parkin

ISBN #9780133872279

12th Edition

839 Questions

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Summary
Learning Objectives
Key Concepts
Example Problems
Explanations
Common Mistakes

Summary

This section dissected fundamental financial concepts by differentiating between finance and money and distinguishing physical capital from financial capital. It explained investment decisions driven by gross and net investments, and analyzed the loanable funds market where saving and borrowing interact to determine real interest rates. Additionally, the material explored the effects of government budget surpluses and deficits through the crowding-out and Ricardo–Barro effects, alongside the inverse relationship between asset prices and interest rates. Overall, these insights are vital in understanding how financial and monetary markets support capital formation and economic growth.

Learning Objectives

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Key Concepts

CONCEPT

DEFINITION

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Example Problems

Example 1

Use the following data to work. Michael is an Internet service provider. On December 31,2014 , he bought an existing business with servers and a building worth $\$ 400,000 .$ During $2015,$ his business grew and he bought new servers for $\$ 500,000 .$ The market value of some of his older servers fell by $\$ 100,000$. What was Michael's gross investment, depreciation, and net investment during $2015 ?$

Example 2

Use the following data to work. Michael is an Internet service provider. On December 31,2014 , he bought an existing business with servers and a building worth $\$ 400,000 .$ During $2015,$ his business grew and he bought new servers for $\$ 500,000 .$ The market value of some of his older servers fell by $\$ 100,000$. What is the value of Michael's capital at the end of $2015 ?$

Example 3

Lori is a student who teaches golf on Saturdays. In a year, she earns $\$ 20,000$ after paying her taxes. At the beginning of $2014,$ Lori owned $\$ 1,000$ worth of books, DVDs, and golf clubs and she had $\$ 5,000$ in a savings account at the bank. During 2014 , 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, DVDs, and golf clubs. a. How much did Lori save in 2014 ? b. What was her wealth at the end of 2014 ?

Example 4

Treasury bond prices rose on Monday, pushing interest rates down. The interest rate on 10 -year bonds fell 4 basis points to $1.65 \%$. What is the relationship between the price of a treasury bond and its interest rate? Why does the interest rate move inversely to price?

Example 5

Use the following data to work.First Call, Inc., a smartphone company, plans to build an assembly plant that costs $\$ 10$ million if the real interest rate is 6 percent a year or a larger plant that costs $\$ 12$ million if the real interest rate is 5 percent a year or a smaller plant that costs $\$ 8$ million if the real interest rate is 7 percent a year. Draw a graph of First Call's demand for loanable funds curve.

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