[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

5. Suppose a new technology makes capital more productive,
leading firms to want to borrow more at each rate
of interest in order to purchase more capital. Using
supply and demand diagrams of the loanable funds
market, show what the likely effect on the equilibrium
rate of interest would be.
6. Suppose younger households decide that they cannot
rely on Social Security and must save more on their
own for their retirement years. What is the likely effect
on the equilibrium rate of interest? Will the equilibrium
amount of borrowing rise or will it fall?
7. We have all heard about winners of $10 million jackpot
lotteries. The winner, however, does not get $10 million
in cash on the spot, but rather typically gets a measly
$500,000 for twenty years. Why is the present discounted
value of the prize much less than $10 million?
Calculate the present discounted value if r = 5 percent.
8. Consider an individual who is borrowing. Assume
the nominal interest rate remains the same but the
rate of inflation increases. What happens to the real
interest rate? Why do you expect the individual to
borrow more?
208 ∂ CHAPTER 9 CAPITAL MARKETS