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Chapter 4: Q. 24 (page 105)
Suppose the U.S. economy began to grow more rapidly than other countries in the world. What would be the likely impact on U.S. financial markets as part of the global economy?
The impact is likely to be a big deal of foreign investment in American markets.
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Which of the following changes in the financial market will lead to a decline in interest rates:
a. a rise in demand
b. a fall in demand
c. a rise in supply
d. a fall in supply
Table 4.6 shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $10 million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest rate shift makes intuitive sense.
| Interest rate | Qs | Qd |
| 5% | 130 | 170 |
| 6% | 135 | 150 |
| 7% | 140 | 140 |
| 8% | 145 | 135 |
| 9% | 150 | 125 |
| 10% | 155 | 110 |
Table 4.6
During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating that there should be a guaranteed minimum price for the natural gas that would flow through the pipeline. The thinking behind the bill was that if private firms had a guaranteed price for their natural gas, they would be more willing to drill for gas and to pay to build the pipeline.
a. Using the demand and supply framework, predict the effects of this price floor on the price, quantity demanded, and quantity supplied.
b. With the enactment of this price floor for natural gas, what are some of the likely unintended consequences in the market?
c. Suggest some policies other than the price floor that the government can pursue if it wishes to encourage drilling for natural gas and for a new pipeline in Alaska.
A price ceiling will have the largest effect:
a. substantially below the equilibrium price. b. slightly below the equilibrium price.
c. substantially above the equilibrium price. d. slightly above the equilibrium price.
Sketch all four of these possibilities on a demand and supply diagram to illustrate your answer
Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)
a. Households in the labor market
b. Firms in the goods market
c. Firms in the financial market
d. Households in the goods market
e. Firms in the labor market
f. Households in the financial market
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