Assignment No. 2
Academic Year:1439-1440 H
Student grade: / 3
Level of the marks:
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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:
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]
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