Question

1. Let’s think about the market for loanable funds. One of its examples is the market for housing loans. Let’s analyze how COVID 19 affects the market for housing loans.

1) Suppose that COVID 19 causes high uncertainty in the future. How does high uncertainty in the market for housing loans affect demand and supply for housing loans? Describe in words how demand or supply or both will shift. (4 points)

2) Let’s analyze how high uncertainty affects the market equilibrium interest rate and quantity of housing loans in three graphs. There may be three cases of change in market equilibrium. In each graph, label clearly a Y-axis and X-axis and market equilibrium point with numbers or variables with subscripts. Show the change in market equilibrium interest rate and quantity of loans with arrows. Summarize how both market equilibrium interest rate and quantity of loans changes for each case in words at the end. Show demand and supply of housing loans before COVID 19 as S0 and D0 and after COVID19 as S1 and D1.  (9 points)

2. Suppose that consumption is $14 trillion, investment is $4 trillion, government spending is $4 trillion, taxes are $4 trillion, and capital inflow and capital outflow are $0.5 billion.

1) Suppose that there is no government and the economy is a closed economy. How much is private saving? Why? (2 points)

2) Suppose that there is a government and the economy is a closed economy. How much is a public saving? Is there a budget surplus, budget deficit, or a balanced budget? How much is a national saving? (3 points)

3) Suppose that there is a government and the economy is an open economy. How much is a net capital flow? Is there a net capital inflow or a net capital outflow or no net capital flow? Is investment greater than national saving or smaller than national saving or equal to national saving? (3 points)

3. Find an interest rate for a Federal government note, a Federal government bill, and a Federal government bond, and a corporate bond of one company. Describe each asset briefly, especially, matur

Answer 1

1. The demand and supply of loans for housing will depend not only depend on the interest rate and the amount of lonable funds available in the market but also on the demand and supply of housing. The high uncertainity created by the pandemic will affect the both these markets and the complete impact on the market for housing loans will constitute a derived affect from housing market.

The high future uncertainity can be of different manners and can affect both demand and supply of housing loans. Regardless, future uncertainity will eventually dercrease both demand and supply of housing loan in the market. The demand gets affected due to this uncertainity because the pandemic has made moving to newer places, investing in new properties very uncertain due to the risk of the pandemic. Not just this but the pandemic has created an uncertainity on household income growth and economic growth as a whole. The biggest impact of this uncertainity is the effect on speculative demand that people have regarding their future investment and saving choices.

2. I have choosen three cases of uncertainity - First, future uncertainity decreases demand and supply for future housing. This discourages future investment in housing, which is why the demand for housing loans deecrease. This decreases quantity of loans and decrease the interest rate.

For the second case of uncertainity, there is high uncertainity regarding returns on the money people save in banks which form the supply of lonable funds. This uncertainity is becuase a nationwide lockdown has reduced people's will to deposit in banks. Such uncertainity decreases supply of lonable funds and hence supply shifts to the left, decreasing quantity of lonable funds and increasing the interest rate.

For the final case, the future uncertainity is about future real income and economic growth. This impacts both the demand and supply for hosing loans. Higher income allows people to invest and save more. Both supply and demand shift left. This results in a huge decrease in quantity of lonable funds. Since in my graph the shift is of equal magnitude, the interest rate does not change. The increase in interest rate due to decrease in supply is countered by decrease in interest rate due to decrease in demand.