7. Problems and Applications Q7 Three students have each saved $1,00. Each has a

Question

7. Problems and Applications Q7 Three students have each saved $1,00. Each has an investment ooportunity in w on the students' investment projects: $1,000. Each has an investment opportunity in which he or she can invest up to $2,000. Here are the rates of return Return Student (Percent) Lorenzo Sam Teresa 15 Assume borrowing and lending is prohibited, so each student uses only personal saving to finance his or her own investment project Complete the following table with how much each student wiW have a year later when the project pays its return Money a Year Later (Dollars) Student Lorenzo Sam Teresa 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 A student would choose to be a borrower in this market if his or her expected rate of return is y thanr Suppose the interest rate is 6 percent

Explanation / Answer

If his expected return was greater than the market interest rate, a student will choose to be a borrower.If the expected rate of return is less than, the student would choose to be a lender.

At an interest rate of 7%, the loanable funds market among these three students would be in equilibrium. At this interest rate, Lorenzo would want to borrow, and Sam would want to lend. (using the explanation in the above answer). Teresa will be indifferent between lending or borrowing thus leaving the supply and demand for loanable funds in the market to be $1000

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