Q.1.Three students have each saved $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return on the students’ investment projects: Harry 5 percent Ron 8 percent Hermione 20 percent a. If borrowing and lending is prohibited, so each student uses only his or her saving to finance his or her own investment project, how much will each student have a year later when the project pays its return? [0.5 Marks] b. Now suppose their school opens up a market for loanable funds in which students can borrow and lend among themselves at an interest rate r. What would determine whether a student would choose to be a borrower or lender in this market? [0.5 Marks] c. Among these three students, what would be the quantity of loanable funds supplied and quantity demanded at an interest rate of 7 percent? At 10 percent? [0.5 Marks] d. At what interest rate would the loanable funds market among these three students be in equilibrium? At this interest rate, which student(s) would borrow, and which student(s) would lend? [0.5 Marks] e. At the equilibrium interest rate, how much does each student have a year later after the investment projects pay their return and loans have been repaid? Compare your answers to those you gave in part (a). Who benefits from the existence of the loanable funds market—the borrowers or the lenders? Is anyone worse off? [0.5 Marks] [Graph-0.5 Marks]

Assignment No. 2

Course: Macroeconomics(Econ-201)

Academic Year:1439-1440 H

Student name:

Student ID:

Semester: 2nd

Student grade: / 3

CRN:

Level of the marks:

Instructions:

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This Assignment must be submitted on Blackboard (WORD format only) via

the allocated folder.

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Email submission will not be accepted.

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You are advised to make your work clear and well-presented; marks may be

reduced for poor presentation. This includes filling your information on the

cover page.

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Assignment will be evaluated through BB Safe Assign tool.

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Late submission will result in ZERO marks being awarded.

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The work should be your own, copying from students or other resources will

result in ZERO marks.

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Use Times New Roman font 12 for all your answers.

Assignment Questions

Q.1.Three students have each saved $1,000. Each has an investment opportunity in which he or

she can invest up to $2,000. Here are the rates of return on the students’ investment projects:

Harry

5 percent

Ron

8 percent

Hermione

20 percent

a. If borrowing and lending is prohibited, so each student uses only his or her saving to

finance his or her own investment project, how much will each student have a year later when

the project pays its return? [0.5 Marks]

b. Now suppose their school opens up a market for loanable funds in which students can

borrow and lend among themselves at an interest rate r. What would determine whether a student

would choose to be a borrower or lender in this market? [0.5 Marks]

c. Among these three students, what would be the quantity of loanable funds supplied and

quantity demanded at an interest rate of 7 percent? At 10 percent? [0.5 Marks]

d. At what interest rate would the loanable funds market among these three students be in

equilibrium? At this interest rate, which student(s) would borrow, and which student(s) would

lend? [0.5 Marks]

e. At the equilibrium interest rate, how much does each student have a year later after the

investment projects pay their return and loans have been repaid? Compare your answers to those

you gave in part (a). Who benefits from the existence of the loanable funds market—the

borrowers or the lenders? Is anyone worse off? [0.5 Marks] [Graph-0.5 Marks]

Answer: –

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