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Question 1:
A: Demand curve D and supply curve S for loanable funds determine the
equilibrium interest rate I. When government borrows $20 billion, supply of
loanable funds is reduced by the same amount and thus shifts towards the left from
S to S1. With demand remaining unchanged, the original demand curve intersects
the new supply curve at e1: as a result the interest rate increases from i to i1 So
increase in government borrowing increases the interest rate.
B: To recall National saving = public saving + private saving
National saving = Investment
It is dear from the above diagram that the initial national saving is L which falls to
Li due to increase in government borrowing. So, national savings fall by less than
$20 billion. Since national savings is equal to investment, investment also declines
by less than $20 billion. Now the increased government borrowing refers to public
borrowing; so public saving declines by exactly $20 billion. Since private saving is
the difference between national savings and public savings, private saving
increases by less than $20 billion.
Investment decreases by less than $20 billion
National savings decreases by less than $20 billion
Public savings decreases by exactly $20 billion
Private savings increases by less than $20 billion
C: Elasticity of supply of loanable funds affects the size of above parameters. If
supply of loanable funds is more elastic, the supply curve for the loanable funds
will be more flat curve. When government borrowing increases, a flat supply curve
will increase interest rate by fewer amounts and the national savings would fall by
less. If the supply curve is less elastic, the interest rate will increase by a greater
amount.
D: Elasticity of demand for loanable funds will also affect the size of above
parameters. If demand for loanable funds is more elastic, the demand curve for the
loanable funds will be more flat curve. When government borrowing increases, a
flat demand curve will increase interest rate by fewer amounts; but reduces the
national savings by more amounts. If the demand curve is less elastic, the interest
rate will increase by a greater amount.
E: The belief that today’s government borrowing implies higher tax payments to
pay off the government debt in the future leads to increased private savings. People
are motivated to save more for excess tax payments in future. As a result, the
supply of loanable funds will increase. Increase in private savings will offset the
reduction in public savings; also reduces the amount by which national savings
decline; also reduces the amount by which interest rate increases.
Question 2:
A: A good example of insider information would be to know how clinical trials
went at a biotech company. If the insider knew that the trials were successful
before the public, he or she could speculate on a stock price increase based on this
information.
B: According to effective markets theory, market prices reflect all public
information regardless of insider information. Since the trading was based on
information that was not yet available to the public, there is no violation of the
hypothesis.
C: It gives an unfair advantage to an insider who can continue to profit from
insider trading for as long as the insider desires. Hence, insider trading is illegal
since it involves taking advantage of unknowing shareholders.
Question 3:
A: The Adult Population = (# Employed + # Unemployed + # Not in the labor
force)
= (139,455,000 + 15,260,000 + 82,614,000) = 237,329,000
B: The Labor Force = (# Employed + # Unemployed)
= (139,455,000 + 15,260,000) = 154,715,000
C: The Labor-Force Participation Rate = 100 X ( Labor force / Adult population)
= 100 X (154,715,000 / 237,329,000) = 65.19%
D: Unemployment rate (“u-rate”) = 100 X ( # of unemployed / labor force)
= 100 X (15,260,000 / 154,715,000) = 9.8%

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