Question
In: Economics
Identify each of the following acts as representing either saving or investment and explain why. a....
Identify each of the following acts as representing either saving or investment and explain why.
a. Fred uses some of his income to buy government bonds.
b. Julie takes some of her income and buys mutual funds.
c. Alex purchases a new truck for his delivery business using borrowed funds.
d. Elaine uses some of her income to buy stock in a major corporation.
e. Henrietta hires a builder to construct a new building for her bicycle shop.
Solutions
Expert Solution
a. Fred uses some of his income to buy government bonds.
- Savings
b. Julie takes some of her income and buys mutual funds.
- Savings
c. Alex purchases a new truck for his delivery business using
borrowed funds.
- Investment
Reason : It is considered an investment because Alex is
borrowing funds to buy a capital for his business which is not
easily convertible to liquid cash and this capital will earn him
some return as the business progresses.
d. Elaine uses some of her income to buy stock in a major
corporation.
- Savings
e. Henrietta hires a builder to construct a new building for her
bicycle shop.
- Investment
Reason : It is investment becuase Henrietta is hiring a
builder to construst a new building which is money spent on capital
which will yield return in the future.
Reason for options a, b, and d : Savings, because each individual is deferring a part of their income in a venture which is highly liquid and earns interest.
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